SINGAPORE (Oct 4): DBS Group Research is maintaining its “buy” call on NetLink NBN Trust with a target price of 87 cents.
Currently, the group secures revenue from about 1.2 million households in Singapore and hopes to secure about 300,000 more subscribers over the next three to five years, as older technologies phase out and the government introduce subsidy schemes for fibre broadband
Overall, the group offers a mid-single-digit EBITDA growth prospects coupled with approximately 6% yield offers mid-single-digit EBITDA growth prospects coupled with about 6% yield at the current stock price of 78 cents.
In a Tuesday report, analyst Sachin Mittal says that there are two possible scenarios once fibre broadband is activated in 100% of homes.
The first is a conservative scenario of about 25,000 households added to Singapore annually, as has been the case historically, translating to about 1.7% annual growth in subscriber base.
Moreover, the group is building resiliency into its core network and expanding to serve outdoor locations.
“These will require additional capex and lead to additional revenue growth due to its pricing framework,” says Mittal.
The second scenario is more optimistic, with households paying for two fibre connections in the long term as has been the case with mobile phones.
Possible examples are new services provided by different players using Internet of Things. In fact, new buildings in Singapore would have provision for four fibre connections in each home, compared to two currently, should the new building code of COPIF 2018 be approved towards the end of 2018.
On the other hand, NetLink’s distribution are much higher than its earnings. But this is due to much higher accounting depreciation than the regulatory depreciation.
“What matters most is the regulatory life of assets (~30 years) as that is used to calculate the regulatory return on the assets,” says Mittal.
While capex may exceed or lag the regulatory depreciation in a given year, management intends to keep the regulatory asset base stable in the long run.
Meanwhile, the analyst reckons that 5G is not a threat for NetLink, as like any other mobile network, it is a shared network, not designed for constant flow of traffic from a single user. 5G cannot compete with fibre in offering unlimited data capacity as rising data will also lead to a rise in 5G capex too.
“There could be opportunities for NetlLink from 5G if there is a need to build one common 5G network for multiple telcos in Singapore. Singapore's regulator has to make the final decision for the 5G model in Singapore,” says Mittal.
In addition, there is a risk that regulatory weighted average cost of capital may be lowered. This is expected to be low due to two reasons.
Firstly, Singapore is offering one of the cheapest fibre broadband services in the world, so the pressure to lower rates is quite low and even with the same WACC, regulatory pricing for fibre is likely to trend downward due to a bigger consumer base in the future.
Secondly, there is significant regulatory focus on the resilience of network as Singapore moves towards being a leading Smart Nation. Hence, fibre players need to be incentivised to invest more in the fibre infrastructure.
As at 11.20am, units in NetLink NBN Trust are trading at 78 cents or 1.0 times FY19 book with a dividend yield of 6.0%.
