SINGAPORE (July 20): Daiwa Capital Markets is initiating coverage on fibre network owner NetLink NBN Trust with a “buy” recommendation and a target price of 97 cents.
On its first day of trading, units of NetLink opened flat on Wednesday at its initial public offering (IPO) price of 81 cents. As at 3.35pm on Thursday, units of Singapore largest listing in six years are still trading flat.
See: NetLink NBN Trust opens flat at IPO price of 81 cents
But Daiwa analyst Ramakrishna Maruvada believes NetLink has some “unique attributes” that bring attractive diversification benefits to investors’ portfolios.
NetLink NBN Trust offers “good quality assets with strong competitive advantages, a predictable return regime, and attractive risk-adjusted distributions relative to other ‘defensive’ stocks,” Maruvada says in a Wednesday report.
See: NetLink NBN Trust launches largest Singapore IPO in 6 years
Maruvada expects NetLink to gain market share in both the residential and corporate markets, on the back of customers migrating to fibre broadband.
“Its underlying assets appear competitively well positioned for the delivery of fibre broadband services due to their extensive network reach, including a monopoly in some areas,” says Maruvada. “As NetLink NBN Trust is the sole supplier of the fibre backbone for the residential market, the trust group’s revenue, in our opinion, is relatively immune to retail customer churn.”
In addition, the analyst says NetLink see predictable revenue and cash flow, with low volatility. FY17-20E revenue and operating cash flow are forecast to grow at compound annual growth rates of 5.7% and 8.7%, respectively.
Annualised distribution per unit (DPU) is expected to rise by 6.0% y-o-y for FY19E compared to FY18E annualised, and remain stable in FY20E.
“The trust structure, which is internally managed with fees paid in cash, and management incentives schemes appear well-thought-out, avoiding some of the recent controversies over fee structures at some Singapore REITS and business trusts,” says Maruvada.
“Similarly, we also think NetLink NBN Trust is a better option for yield investors over Singapore-listed telecom stocks, whose outlook is likely to be impacted negatively by the entry of TPG Telecom,” he adds.
