Resistant to Operational Risks; Maintain BUY

• Following our recent initiation of NetLink Trust (see NetLink Trust: Safety First ), we summarise key issues raised by investors and maintain our positive view on its underlying defensive business. We believe our forecast of a 95% fibre connection penetration rate by FY21E is viable and that 5G is more likely an opportunity than threat.
• Maintain our DDM-based (COE of 6%, LTG 0%) Target Price of SGD0.93 and BUY.
• Any challenge to its current level of regulated returns is the main risk to our outlook.

Fibre the Only Way to Go

With 82% of fixed-broadband subscribers on fibre vs a 95% fixed-broadband household penetration, a critical element of our forecasts is the migration of all fixed broadband to fibre.

We note that Singtel (SGX:Z74) and StarHub (SGX:CC3) have stopped marketing their non-fibre broadband services; with the latter announcing the end of further cable-based deployment in Apr 2018. Some 97% of Singtel’s fixed-broadband subscribers were on fibre as of June. The rest will likely migrate by year-end. 

Essentially, as subscribers’ contracts end, typically after two years, the option for faster fibre at similar pricing should make the shift enticing and likely.

5G More Opportunity Than Threat?

• We believe 5G in its current form in Singapore is not a major threat to fibre-broadband demand
• Market earnings risk-aversion cycles could boost interest in NetLink’s stable returns. 

Downside 

• Any downward revision in the regulated returns during the next review period impacts long-term fair value. 
• Pricing competition in the non-residential segment. 
• Rising interest rate cycle would reduce the attractiveness of NetLink and similar stocks in the same asset class. 

Source: Maybank Kim Eng Research - 17 Sep 2018