SINGAPORE (Mar 23): DBS Group Research is maintaining its “buy” call on Netlink NBN Trust with a lowered target price of 95 cents from $1.05 previously.
Year-to-date, the stock has dropped some 11.2% to trade at 84 cents on 11.35am of Mar 23.
In a Monday report, analyst Sachin Mittal says, “NetLink is trading at 5.8% yield, compared to an average yield of 6.2% offered by large-cap industrial S-REITs. We argue that Netlink should trade at 80-100 basis points (bps) lower yield than industrial S-REITs’ as Netlink’s distributions are largely independent of the economic cycle due to the regulated nature of its business; Netlink’s asset life is much longer as it incurs annual capex to replenish its depreciated asset base, and Netlink’s gearing is less than half of S-REITs’ with ample debt headroom to fund future growth.”
The analyst benchmarks Netlink’s yield against industrial S-REITs whose asset life is 40-50 years. Netlink, on the other hand, incurs an annual capex of $50-60 million to replenish its depreciated asset base, leading to a very long asset life.
Currently, the trust’s net debt to EBITDA of less than 2 times, which implies ample room for raising cheap debt if needed. Regulated Asset Base (RAB) Trusts can lever up to 5 times easily, according to the analyst, implying that Netlink can easily raise up to $500 million in additional debt if required.
With this, the trust can use its debt headroom to invest in Smart Nation initiatives.
However, in the case of continued market dislocation due to the Covid-19 outbreak, industrial S-REITs could decline to -2SD valuation in the worst-case scenario. This would imply industrial S-REITs’ average yield dropping to 7.7% from 6.2% currently, while share price is believe to shed some 20%.
“Given higher earnings resilience, lower gearing and longer asset life of NLT, we project Netlink to trade at 90bps of 6.8% under our bear case scenario,” says Mittal.
This translates into a bear-case price of 76 cents per share. This implies a downside risk of 10% including 5.8% yield.
