Netlink NBN TrustCJLU is interesting because it is internally managed but has not made an acquisition since its IPO in 2017 at 81 cents per share. As a result, its unit price has managed to appreciate 91 cents as at May 24. At this price, based on its historical FY2023 ended March DPU of 5.24 cents, its yield is around 5.75%. Netlink’s DPU has been steadily increasing since its IPO. In FY2018, FY2019, FY2020, FY2021 and FY2022, DPU was 3.24 cents, 4.88 cents, 5.05 cents, 5.08 cents and 5.13 cents, respectively.
Since Netlink is internally managed, it is not under pressure to make an acquisition. That has helped take the pressure of equity fundraising off the unit price. However, a possible drawback is its business model. As the owner of the fibre network of Singapore’s National Broadband Network (NBN), pricing is highly regulated. On the other hand, Netlink is in a very defensive sector — so long as it is not open to competition.
In terms of growth, Netlink could benefit from the Singapore government’s recently announced initiative to develop a new digital connectivity blueprint. The plan includes the development of future-ready broadband, mobile and Wi-Fi infrastructure. In a press release, Netlink says it will provide its expertise and infrastructure to support the upgrade of the NBN that will deliver internet speeds of up to 10Gbps.
Of course, growth requires investment. As of March 31, Netlink’s gearing stood at 20% so that it can take on debt. However, the cost of debt is currently elevated at around 4%.
More interesting is Netlink’s valuation benchmarks. According to the company, its weighted average cost of capital (WACC) is 7%, historical DPU yield is 5.75%, and year-to-date return is more than 9%. This means investors are getting a return on their investment that is better than the company’s internal rate of return.
In FY2023, Netlink made a net profit of $109.2 million but paid out $204.2 million. This is because, as an infrastructure trust, depreciation is a large but non-cash item. In FY2023, the depreciation charge was $170.6 million. The useful life of ducts and manholes is 35 years, while that of fibre and related infrastructure is 25 years.
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There is an impact on the balance sheet because retained earnings comprise the prior balance plus net profit and fewer dividends. Hence, Netlink reports an accumulated deficit which affects its NAV. The NAV per unit in FY2023 declined to 67.5 cents from 69.7 cents. NAV of infrastructure trusts can decline as part of the capital is returned as DPU during the concession period of the assets. Interestingly, Netlink retained $48.9 million in reserves.
Elsewhere, there may be some short-term pressure on the unit price of Mapletree Industrial Trust (MIT). Its manager announced the acquisition of a data centre in Osaka, fully leased to a data centre operator, for the equivalent of $500.1 million. A placement of not less than $200 million has been announced to partly fund the acquisition. The price range is $2.16 to $2.212 per unit, a discount to MIT’s last traded price of $2.28 on May 24.
The short-term selling pressure on MIT may dissipate as prices approach the support area around $2.16. As with other REITs and trusts that have announced equity fundraising, prices are likely to rebound.
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Technically, Netlink looks to strengthen further as the moving averages become increasingly aligned, and prices have moved above a thrice-tested resistance level at 89 cents, indicating an upside target.
