• Some 10,000 end-users in the eastern part of Singapore suffered outages in fibre services on 14 Nov 18 when an errant contractor severed fibre cables while performing construction work along Tampines Avenue 9. Fibre services were restored within 24 hours.
• NetLink’s fibre network is susceptible to damage by contractors undertaking earth works, resulting in intermittent disruptions due to cable cuts. NetLink is entitled to recover compensation from contractors who damage its installation, whether negligently or accidentally, under the Telecommunications Act. As such, the occasional cable cuts do not have a negative impact on NetLink financially.

2QFY19 results: Solid growth from residential and non-residential segments.

• NetLink achieved broad-based growth across its various services. In 2QFY19, residential fibre connections grew 8.6% y-o-y and 2% q-o-q to 1,241,000. Non-residential fibre connections grew 8.3% y-o-y and 1.6% q-o-q to 45,500. Non-building access point (NBAP) fibre connections grew 13.4% q-o-q to 1,280. Revenue contributions from residential, non-residential and NBAP segments grew 23.9%, 49.8% and 7.3% y-o-y respectively.
• Diversion revenue expanded five-fold to S$7.1m due to completion of projects for government agencies, such as the Land Transport Authority, the Public Utilities Board and the Housing Development Board. EBITDA margin narrowed by 2.4ppt compared to IPO projection as diversion revenue carries lower margins.
• NetLink incurred write-off of S$0.8m for old security-related assets for its seven central offices. 2QFY19 results would be even better if we exclude the write-off.

• NetLink declared DPU of 2.44 S cents for 1HFY19. The distribution payment date is 27 Nov 18.
• Assuming the DPU for 2HFY19 stays the same, the annualised DPU of 4.88 S cents is 5.2% higher than the projected DPU of 4.64 S cents provided in its IPO prospectus.

• NetLink is on track to achieve the number of end-users fibre connections for residential and non-residential segments projected in its IPO prospectus. It will expand network coverage to new housing estates at Sengkang, Punggol and Tengah. It will support requesting licensees, such as Singtel (SGX:Z74), StarHub (SGX:CC3) and M1 (SGX:B2F), on serving new end-users for non-residential and NBAP fibre connections.
• NetLink is well positioned to support Smart Nation initiatives, development of Jurong Innovation District and Punggol Digital District and the fourth mobile operator.

• NetLink has a dominant market share of 90% for residential and 35% for non-residential connections, where growth is projected at a 3-year CAGR of 6.2% and 8.5% respectively in FY18-21.

• We forecast DPU of 5.1 cents for FY19 and 5.3 cents for FY20F. NetLink NBN Trust provides attractive distribution yields of 6.6% and 6.9% for FY19-20 respectively.

• Our target price of S$0.99 is based on DCF methodology (cost of equity: 6.5%, terminal growth: 1.8%).