Raising DPU Forecasts and TP; Maintain BUY

• With NETLINK NBN TRUST (SGX:CJLU)’s healthy balance sheet providing leverage flexibility to finance capex, we believe DPU is not only sustainable but also more likely to be linked to operating cash flows rather than FCF growth. As such, although we make no changes to operational assumptions, we raise our DPU forecasts and DDM-based (COE 6%, LTG 0%) Target Price by 9% to SGD1.03. See NetLink Trust share price; NetLink Trust dividend history.
• Maintain BUY where risks to our outlook include any negative revisions to its regulatory regime.

Big Picture Is Clear…

• In prior results briefings, NDRs and company visits, management repeatedly emphasised its low net debt to EBITDA of 2x. This can support an increase in RAB-related capex. Based on our sensitivity analysis, additional capex of SGD250-500m on top of our assumptions would still keep leverage at management’s 3-4x comfort level. This is without factoring in any revenue upside from such capex.
• In theory, additional RAB capex will secure a guaranteed 7% pretax WACC return. Previously, we assumed that its payout policy of 100% of cash available for distribution would be based on FCF. This implied that capex escalation would affect DPU. But flexibility and intention to lever up to finance capex now prompt our DPU revisions.

…though Details Are Not Yet

• Management has yet to disclose the additional capex it needs for this year onwards, though it has indicated that the capex will be for network densification and has been flagged to regulator IMDA. See report: NetLink NBN Trust - Safety In Numbers.
• Pre-approval for such expansion is not required but is part of its efforts towards a transparent rate review from FY22E onwards.

Residential Growth Is Key; 5G An NBAP Bonus

• Following a residential-connection growth spurt this year driven by StarHub (SGX:CC3)’s fibre migration, management expects normal growth to be led by Singapore’s 25k annual household formation.
• Meanwhile, although 5G base-station linkage by fibre will be a boon for NBAP connection and installation revenue, we have captured this to a degree, in our assumption that NBAP and segment revenues doubles in revenue share will double to 4% by FY22E, albeit still tiny.

Source: Maybank Kim Eng Research - 16 Oct 2019