Netlink NBN Trust

Price targets:

CGS-CIMB Research ‘add’ 95 cents DBS Group Research ‘buy’ 98 ents UOB Kay Hian ‘buy’ $1.01

Citi ‘buy’ $1.06

Completion of IMDA price review

The Infocomm Media Development Authority (IMDA) announced on Nov 27 the results of its review of the wholesale prices, terms and conditions of Netlink NBN Trust’s interconnection offer (ICO) for the next five years. This has removed a months-long overhang on the fibre network infrastructure operator, and analysts are relieved at the “long-award closure”.

Revised prices, which will take effect from April 1, 2024, are lower for residential and non-building address point (NBAP) connections, down 2% to $13.50 and 4% to $70.50 respectively. Non-residential end-user connection prices will remain unchanged at $55.00 per month.

CGS-CIMB Research analyst Ong Khang Chuen, who has kept his “add” call and 95 cents target price in his Nov 27 note, thinks the review outcome is “slightly better than expected”. He had assumed a 2% reduction in Netlink’s residential ICO pricing and a 5% reduction for non-residential and NBAP connection pricing, given a higher number of active fibre connections.

“The latest development removes a key overhang on NLT’s share price for the past year, and we think it strengthens our investment thesis of NLT as a defensive amid macro uncertainties, given strong distribution per unit (DPU) visibility.”

Ong likes Netlink’s strong operating cash flow generation, which should continue to support “stable” DPU growth of 2% per annum through to FY2030 “without meaningfully impacting its debt profile”. He forecasts a DPU of 5.3 cents for FY2024 ending March 2024, which represents a 6.5% dividend yield.

Similarly, DBS Group Research had projected much more aggressive cuts. “Given that the riskfree rate has risen to 3.0% compared to 2.1% seen at the time of its IPO in 2017, we had expected a 20-30 basis points (bps) rise in the regulatory return … However, Netlink has been allowed a regulatory return of 7%, same as last term, for a five-year period from April 2024.”

DBS is maintaining “buy” on Netlink with

an unchanged target price of 98 cents, slightly higher than that of CGS-CIMB’s Ong. “We don’t see any impact on its FY2024/2025 distributions, which might rise by 1%–3% annually and can be sustained in the long-term.”

Netlink is trading at a 6.5% yield at 350 bps spread over Singapore’s risk-free rate, which is “very attractive”, says DBS. “Netlink’s 6.5% yield is also higher than the 5.8% average offered by industrial REITs despite Netlink’s much longer asset life, as Netlink incurs capex each year to maintain/enhance its regulated asset base.”

While Netlink has a long runway, UOB Kay Hian Research analysts Chong Lee Len and Llelleythan Tan expect near-term share price weakness “as total returns in the near term are adversely affected by the review [compared to] expectations of higher returns to compensate for elevated interest rates environment and expected higher cost base from inflationary pressures”.

Netlink may propose to conduct a mid-term price adjustment in the third year of the pricing period, or FY2027, note Chong and Tan. “Management noted that upcoming expected interest rate cuts in the short term alone would not trigger a mid-term adjustment and the group would look at other factors, such as opex/capex plans, before triggering a review.”

They expect the fall in prices for residential and NBAP connections to have an “insignificant” impact on FY2025–2026 earnings. “The $0.30 price reduction for residential connection implies a loss of around $5 million in annual revenue and would reduce our current FY2025–2026 patmi estimates by only 1%–2%.”

They add: “Furthermore, given that Netlink has been adding roughly 20,000 new residential connections per year, we expect new revenue contributions of roughly $2 million to partially offset the $5 million drop in revenue loss before returning to pre-price reduction levels by 1HFY2026.”

Dividends will remain unaffected, say Chong and Tan, who have kept their “buy” call and $1.01 target price. “Armed with strong annual operating cash flows of around $300 million, management noted that the group expects distributions to stay stable despite lower revenue contributions from the residential connections segment. Also, despite higher capex commitments in FY2024– 2025, the group noted that additional capex net from its surplus cash after distribution would be borrowed, backed by the group’s strong balance sheet, with low 21.5% net gearing.”

Finally, Citi Research analysts Luis Hilado and Arthur Pineda had anticipated much worse cuts of 8% for the review. They have revised upwards their revenue and profit forecasts for FY2024/2025 by 4%/6% and 6%/13%, respectively.

In a Nov 27 note, the Citi analysts maintained “buy” on Netlink with a higher target price of $1.06, from 99 cents previously. This is the highest target price among the four research houses mentioned here.

“We have conservatively not assumed a rate increase within the next five-year window,” write Hilado and Pineda. “Even without such assumption, our revised target price provides healthy returns with at least five years of sustainable yield of over 6%.” —