• NetLink Trust (SGX:CJLU) delivered 2QFY21 (Jul 2020 to Sep 2020) net profit of S$21.3m (-8% y-o-y, -9% q-o-q) on higher tax expense vs tax credits of S$0.97m and $S0.95m for 2QFY20 and 1QFY21 respectively. Positively, 2QFY21 PBT came in strong at S$24.4m (+10% y-o-y, +8% q-o-q). The robust operational performance was driven by:
  1. higher residential revenue (+3% y-o-y);
  2. EBITDA margin expansion of 4ppt to 77%; and
  3. government grants.
• This was partly offset by lower installation-related and diversion revenue as fewer construction activities have been carried out year-to-date due to the COVID-19 pandemic.
• NetLink Trust's 1HFY21 net profit of S$44.8m (-2% y-o-y) came in within expectations, accounting for 46% of our full-year earnings forecast.
• NetLink Trust declared 1HFY21 DPU of 2.53 cents. We forecast DPU of 5 cents and 5.1 cents for FY21 and FY22 respectively, translating to an attractive dividend yield of 5.3% respectively.

Resilient growth in fibre connections boosts recurring revenue.

• NetLink Trust recorded 2% y-o-y growth (flat q-o-q) in residential fibre connections to1.437m in 2QFY21. Non-residential fibre connections expanded 2% y-o-y and 1% q-o-q to 47.6k, while non-building access point (NBAP) connections grew 18% y-o-y and 4% q-o-q to 1,847. The resilient performance suggests strong underlying demand for fibre services amid rising data consumption.
• All in all, recurring revenue was higher, accounting for 83% of NetLink Trust's 2QFY21 revenue (2QFY20: 80%).

2QFY21 EBITDA margin inched up 4.4ppt to 77% (flat q-o-q).

• This reflected:
  1. lower operations and maintenance (O&M) cost due to reduced usage of contractor resources;
  2. lower installation and diversion cost;
  3. higher COVID-19-related grants from the government; and
  4. lower finance cost due to lower average interest rate.
• More importantly, 90% of NetLink Trust’s costs are fixed in nature (staff cost, fibre cost) and therefore, operating company. That said, as fibre connections continue to grow, the company benefits from economies of scale.

NBAP continues to benefit from digitisation… and 5G rollout starts in Jan 21.

• For 2QFY21, NetLink Trust grew NBAP connections by 18% y-o-y and 4% q-o-q to 1,847 connections. The division will continue to benefit from the ongoing Smart Nation initiatives as the government continues to encourage higher productivity through digitisation. A smart housing estate, for example, will require fibre to connect sensors, WiFi hotspots and outdoor infrastructure (part of NBAP connections) which will pave the way for future smart applications in a smart nation ecosystem.
• As Singapore will start to roll out 5G network from Jan 21 onwards, NetLink Trust is expected to benefit from higher NBAP connections due to network densification requirement. In essence, fibre is required to deliver the high speed and low latency characteristic of 5G technology. We expect the 5G nationwide licensees like the StarHub (SGX:CC3) and M1 consortium, as well as the localised licensee TPG to work closely with NetLink to provide comprehensive fibre infrastructure to minimise total 5G capex.

Strong balance sheet.

• NetLink Trust has a low gearing with gross debt/EBITDA at 2.5x while pre-adjusted EBITDA interest coverage is high at 13.8x. This implies sufficient debt headroom for the group to finance further expansion, assuming NetLink Trust keeps within the threshold of 4x for gross debt/EBITDA.