Post NDR Feedback - Investment Thesis Intact. BUY

• We hosted NETLINK NBN TRUST (SGX:CJLU) management on a Singapore NDR and came away confident in the security of operating cashflows and DPU for the short-to long-term.
• With a virtual residential-fibre monopoly and guaranteed regulated returns, NetLink Trust provides a haven amid the current industry turbulence.
• Maintain BUY with risks to our outlook from any negative revisions to its regulatory regime.

Short-term Growth Supported by Cable Migration

• Continued residential cable migration by StarHub to NetLink Trust’s fibre network is expected to continue to drive higher than normal connection growth for at least the next quarter. Including homes that have no broadband connection at all, there is a potential 126k fibre connections to be made.
• In the longer-term, a general annual increase of 25k households from public and private sector endeavours will provide organic growth.
• Meanwhile, although there are around 300k registered businesses in Singapore there are only 130k non-residential end users of which NetLink Trust currently has 46k (35%) share.

Higher Capex – Not a Problem

• NetLink Trust is increasing its capex this year partly on network densification efforts in order to lower latency even further. Although no regulatory approvals are required, regulator IMDA is kept updated of plans.
• Management has not disclosed the higher level of capex for FY20, but given a low net debt to EBITDA level of 2x additional leverage can be taken on to support such.
• More importantly, given the RAB regulatory framework, NetLink Trust is guaranteed a 7% pre-tax WACC return for qualified capex for the current rate period.

Potential DPU Upside From Healthy Balance Sheet

• Management also assured investors that the SGD190m cash distribution for FY19 is at least sustainable. We have assumed a minor dip to SGD186m this year but assume this will increase above SGD200m in the long-term.
• If NetLink Trust levered up to 3x net debt to EBITDA, an additional SGD350m (SGD0.09 per unit) above our current DPU forecasts could be provided to unit holders.

Other Meeting Highlights

• Although the current environment is of falling interest rates, there has been no indication of a review for the current rate of return being triggered. The next formal review period will period in FY22 and be set for FY23.
• Management is currently evaluating financing options for its capex. This includes deciding on rated or non-rated debt facilities.
• Management qualified that although it had proposed to be the single 5G passive network provider in the recent IMDA consultation, the initial guidelines indicated were for a two network set up. It is management’s view that a single network could save on site redundancy and that a regulated return on capex under a RAB framework incentivizes a faster deployment.
• Even without being appointed as a license holder for 5G, NetLink Trust will partly benefit from the fibre deployed to connect a higher amount of base stations necessary to support 5G.
• Part of the slower non-building access point (NBAP) deployment for government’s SmartNation initiatives is the equipment to be located at such points (e.g. lamp post) need more power than currently available.
• Fibre broadband equipment is capable of 10Gbps download speeds already but demand/take up is limited with the current set of applications and content. It is the telco service providers that provide the equipment and not NetLink Trust. This has also limited demand for opening up the second fibre point that is present in most households.
• Competition from SP Telecom (Not Listed) may eventually show up in the non-residential side but most likely will be initially targeted at data centres operated by the SP group. It is unlikely to spill into the residential connection space.
• Although 5G speeds are comparable with today’s fibre, the latter will always have an edge. Likewise, the amount of data an average household consumes on fixed broadband is much higher than wireless broadband and would lead to a more expensive bill for the average Singapore user. This makes it more economical to maintain both services rather than switch to a pure wireless broadband consumption model.
• Maintenance capex is not actually the SGD40m-60m level but less than 20% of these amounts.
• Fibre has a 30-year life per manufacturer’s claims but likely to last longer in practice.
• Management is comfortable to reach a long-term leverage of 3x-4x debt to EBITDA.

Source: Maybank Kim Eng Research - 21 Aug 2019