Analysts at CGS-CIMB Research and DBS Group Research have maintained their “add” and “buy” calls for NetLink NBN Trust with unchanged target prices of $1.10 and $1.05.
In his May 18 note, CGS-CIMB analyst Ong Khang Chuen points out that Netlink is currently undergoing review of its services offered under its interconnection offer (ICO) for the next review period (2023-2027) with Infocomm Media Development Authority (IMDA).
The company expects the review to only be completed in early 2023, mainly due to the additional time required for IMDA to complete the public consultation process on changes in certain non-price terms and conditions. “With a rising rates environment, we believe concerns over a cut in regulatory weighted average cost of capital model (WACC) should subside.
“We conservatively price in a 3% reduction in ICO pricing for the next review period in our forecasts, given a higher denominator (with increase in number of fibre connections), but believe that Netlink’s strong operating cash flow generation can continue to support stable DPU growth of about 1.5% per annum without meaningfully impacting its debt profile.”
Meanwhile, the DBS analysts estimate that each 10 basis points rise in regulatory rate would have a +1% impact on Netlink’s EBITDA and vice versa.
“When Netlink debuted on the Singapore Stock Exchange in July 2017, the 10-year Singapore bond’s yield was 2.1%. Currently, these risk-free bonds offer a yield of 2.75%. A higher risk-free rate implies rise in the regulatory rate of return for the next five years from Jan 2023 in our view,” the analysts add.
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With minimal downside risks to its distributions and its strong balance sheet, the DBS analysts believe Netlink should be able to support any unforeseen challenges in its business.
Netlink’s FY2022 DPS of 5.13 cents per share represents a 5.2% dividend yield, in line with CGS-CIMB’s estimates. The company saw healthy growth across all fibre segment connections in 4QFY2022.
The bright spot remains the non-building address point (NBAP) segment, which is the fastest growing with 4,305 total connections as Netlink supplemented local telcos’ rollout of 5G infrastructure and smart nation linked initiatives, says Ong.
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Having fine tuned his FY2023-FY2024 forecasts, Ong cites earnings accretive acquisitions as well as stronger-than-expected growth in NBAP connections as potential re-rating catalysts.
As at 2.35pm, units in Netlink are trading flat at 99.5 cents.
