• NetLink’s 1QFY22 net profit increased 6% y-o-y to S$24.8m on higher installation and NBAP revenue, as well as lower finance cost. Sequential weakness was due to lower tax credit. 1QFY22 earnings is within expectations. We continue to like the stock for:
  1. its good earnings visibility,
  2. sustainable dividend yields, and
  3. it being a key beneficiary of 5G rollout in Singapore.
• NetLink NBN Trust offers a dividend yield of 5.3% for FY22-24. BUY on weakness with an unchanged DCF-based target price of S$1.08.

NetLink's 1QFY22: Within Expectations

• NetLink NBN Trust (SGX:CJLU) delivered a core net profit of S$24.8m (+5.5% y-o-y, -24.2% q-o-q) in 1QFY22. The y-o-y improvement was driven by:
  1. a 5% revenue growth given higher installation-related revenue (+129% y-o-y) and non-building access point (NBAP) revenue (+48% y-o-y), and
  2. lower finance cost (-33% y-o-y).
• The sequential weakness was due to lower tax credit (4QFY21: S$4.2m, 1QFY22: S$0.8m) and higher finance charges (4QFY21 recorded a finance gain of S$2.7m amid realised gain from interest rate hedge vs 1QFY22: -S$3.2m). 1QFY22 core net profit accounted for 25% of our full-year forecast, within expectations.

Resilient growth in fibre connections sustains recurring revenue.

• NetLink NBN Trust recorded a 2% out government grants, EBITDA margins would have been stable y-o-y.

Stock Impact

• Stable FY22 outlook. Key priorities include connecting data centres’ point-to-point connections. More importantly, NetLink re-iterated that its business remains resilient amid market volatility.
• Safe haven; attractive 5.3% dividend yield. Management remains cognisant of NetLink’s profile as a high-yielding, safe haven stock. As such, key criteria of any potential new investment in the near horizon would have to include:
  1. country risk premium, and
  2. preferably stable cash flow via an asset sale and leaseback model.
• Importantly, NetLink will have sufficient terms of overseas/domestic acquisition approach.

Earnings Revision / Risk

• No change to earnings.

Valuation / Recommendation

• BUY on share price weakness; DCF-based target price of S$1.08 (cost of equity: 6.3%, terminal growth: 1.8%).

• At our target price, NetLink NBN Trust trades at 17x FY21F EV/EBITDA, +1 standard deviation above its three-year mean EV/EBITDA of 15.3x. We expect NetLink NBN Trust to further outperform as investors seek shelter in high dividend-yielding stocks amid external volatility.

Share Price Catalyst

• Key catalysts include:
  1. 5G beneficiary – more opportunities arising from mobile operators’ fibre network densification demand,
  2. growth in demand for NBAP connections with the rollout of 5G/Smart Nation initiatives, and
  3. investors seeking defensive yield from NetLink NBN Trust's resilent, predictable, transparent and regulated cash flow.

Source: UOB Kay Hian Research - 25 Aug 2021