• NetLink Trust's 3QFY20 net profit grew 10% y-o-y but dropped 7% q-o-q to S$21m on the back of lower installation service revenue and higher depreciation charges. This was partly offset by a 11% y-o-y residential connections growth, albeit at a slower pace sequentially with the completion of StarHub (SGX:CC3)’s fibre migration programme. Results are within expectations.
• NetLink Trust offers good earnings visibility and sustainable dividend yield of 5% for FY20-21. BUY on share price weakness.

3qfy20 Results

Results within expectations.

• NetLink NBN Trust (SGX:CJLU) delivered revenue of S$92m (+3% y-o-y, -3% q-o-q) and net profit of S$21m (+10%, -7% q-o-q) for 3QFY20. This brings 9MFY20 net profit to S$65.6m (+15% y-o-y). Accounting for 77% of our full-year net profit forecast of S$85m, we deemed the results to be within expectations.
• The sequential drop in net profit was due to lower installation related revenue and higher depreciation charges. This was partly offset by higher residential connection revenue (+11% y-o-y; +1% q-o-q) and economies of scale (EBITDA margin expanded 3ppt to 73.6% in 3QFY20).

Residential: Robust connections growth, albeit at a slower pace with completion of Starhub fibre migration programme.

• NetLink Trust recorded 11% y-o-y and 1% q-o-q growth in residential fibre connections to 1.421m in this quarter. This drove a 13% y-o-y and 2% q-o-q increase in residential connection revenue.
• StarHub completed its fibre migration process on 30 Sep 19. From hereon, we expect residential connections growth to moderate to 2% y-o-y (FY21-22), underpinned by 25,000 new homes in Singapore annually.

Non-residential: Stable base.

• Non-residential fibre connections expanded 4% y-o-y and 1% q-o-q to 47,408. Revenue contribution from this segment grew 4% y-o-y and 1% q-o-q.
• Non-building access point (NBAP) connections grew 12% y-o-y and 5% q-o-q to 1.642m, while revenue contribution from this segment surged 8% y-o-y and 2% q-o-q.

Economies of scale.

• 3QFY20 EBITDA margin rose 3ppt y-o-y and 0.6ppt q-o-q to 73.6% as a result of:
  • economies of scale, and
  • SFRS 16 impact – effective 1 Apr 19.
• This was partly offset by higher depreciation expenses on larger fixed asset base and higher other operating expenses for IT maintenance. Excluding the impact of SFRS 16, EBITDA margin would have been 72.8%, or 2.2ppt higher y-o-y.

Stock Impact

• Key priorities for FY21 include:
  1. Residential: New housing developments to drive 2% y-o-y growth in residential connections,
  2. Non-residential: Partnerships with Requesting Licensees (RLs) and to continue to serve SMEs (approximately 200-300,000 business connection opportunities) and government agencies with a focus on SMEs, and
  3. NBAP: Adding capacity, flexibility and resilience to denser network and preparing to support 5G infrastructure.

Capex to exceed FY19’s spend as NetLink seeks to densify network.

• We expect FY20’s capex to exceed the S$71m capex spent in FY19 as the company aims to densify the network. This will drive the RAB and earnings of NetLink Trust.
• Unlike telcos, we do not expect NetLink Trust’s cashflow to be impaired by the 5G roll-out as the company is a passive infrastructure owner. Active hardware needs will be upgraded/replaced by telcos. Therefore, the onus of rolling out the 5G network (and heavy capex burden) lies on the telcos/spectrum holder.

Strong balance sheet.

• NetLink Trust has a low gearing with gross debt/EBITDA at 2.4x while EBITDA interest coverage is high at 13.6x. There is sufficient debt headroom of S$400m for FY20 to finance further expansion, assuming NetLink Trust keeps within the threshold of 4x for gross debt/EBITDA.

Earnings Revision / Risk

• No change to our earnings forecast.

Valuation / Recommendation

• Maintain BUY with a DCF-based target price of SGD1.05 based on cost of equity: 6.3% and terminal growth: 1.5%. At our target price, the stock trades at 17.2x EV/EBITDA, +1SD to its 3-year mean EV/EBITDA of 15.3x.
• NetLink Trust has outperformed the STI by 8% ytd and we expect further outperformance as investors seek shelter in high dividend yielding stocks amid external volatility.
• Buy on:
  1. good earnings visibility, and
  2. attractive dividend yields.

Share Price Catalyst

A clear beneficiary towards 5G roll-out

• A clear beneficiary towards 5G roll-out on the back of:
  1. higher connections and higher installation-related revenue, and
  2. the onus of rolling out 5G network lies on the Mobile Network Operators (MNOs).
• Growth in demand for NBAP connections should the government accelerate the roll-out of 5G/Smart Nation initiatives.
• Investors seeking defensive yield from NetLink Trust’s resilient, predictable and transparent and regulated cash flows.

Source: UOB Kay Hian Research - 11 Feb 2020