NetLink NBN Trust

Price target:

PhillipCapital “accumulate” $1.03 OCBC Investment Research “buy” $1.10 Maybank Kim Eng “buy” $1.11 UOB Kay Hian “buy” $1.08 CGSCIMB “add” $1.10

Resilient earnings and sustainable distributions

Following resilient earnings reported in 1HFY2021, five in six brokerages are recommending investors to accumulate units in NetLink NBN Trust (NLT), after it reported distribution per unit (DPU) of 2.53 cents for 1HFY2021, up 0.4%. Earnings in the same period were up 1.5% y-o-y to $44.8 million.

PhillipCapital, CGS-CIMB, OCBC Investment Research, Maybank Kim Eng and UOB Kay Hian are all maintaining their “buy” or “add” calls. DBS Group Research differs with its “hold” call and target price of $1.02.

“We are more conservative in our valuation,” said analysts Sachin Mittal and Lim Rui Wen in their Nov 10 note. “We expect annual capex to hover between $55 million and $60 million in the long term and any potential acquisition or rise in capex could be a positive surprise. Any reduction in regulatory WACC (weighted average cost of capital) in the next review period could be a negative surprise.”

Mittal and Lim note that the 2QFY2021 results recorded a one-off tax surprise. “2QFY2021 revenue $94.1 million (–2% y-o-y/+4% q-o-q) and net profit at $21.3 million (–8% y-o-y/–9% q-o-q) were broadly in line except for the tax deduction of $3.1 million,” they say.

CGS-CIMB analyst Ong Khang Chuen notes that NLT continued to see growth in all three types of fibre connections, and he believes the current growth trajectory is sustainable. Its residential segment reached 1.44 million connections in 2QFY2021 (0.6% q-o-q, +1.9% y-o-y) as NLT reached more new homes and added connections to low-income households via initiatives such as IMDA’s Home Access programme.

Non-residential connections resumed growth to 476,000 (+1.3% q-o-q) after a dip in 1QFY2021, which saw the “circuit breaker” impacting new additions. The non-building address point (NBAP) segment saw the fastest connection growth to 1,847 (+4.2% q-o-q, +17.7% y-o-y) as NLT supplemented local telcos’ rollout of 5G infrastructure, he adds.

OCBC Investment Research analysts note the growing prominence and potential of the company. “With the increasing usage of fibre broadband services for day-to-day activities driven by growing demand for connectivity and rapid broad-based growth in data consumption, we believe NLT NBN has a resilient business model, and is hence able to weather through various economic cycles given the defensive nature of its income streams.”

“Furthermore, we expect NLT NBN to be a key participant of growth in other connected services within the non-residential and NBAP (non-building access point) space, especially with Singapore’s push to transform into a digital economy,” notes OCBC.

PhillipCapital’s Paul Chew anticipates NLT to generate free-cash-flow of $204 million. This is expected to support its attractive distribution, which he expects to be 5.08 cents for FY2021.