• NetLink NBN Trust grew 2QFY22 core net profit by 30% y-o-y and 12% q-o-q to S$27.7m on higher NBAP and diversion revenue, as well as lower finance cost. This brings 1HFY22 core net profit to S$52.5m (+17% y-o-y), in line with our estimates.
• NetLink NBN Trust declared 1HFY22 DPU of S$0.0256 and we expect full-year DPU of S$0.051.
• We downgrade NetLink NBN Trust from BUY to HOLD as it is trading close to our DCF-based target price. NetLink NBN Trust offers sustainable dividend yield of 4.9% for FY22-24.

NetLink Trust's 2QFY22 Within Expectations

• NetLink NBN Trust (SGX:CJLU) delivered a 2QFY22 core net profit of S$27.7m (+30.1% y-o-y, +11.7% q-o-q). Headline net profit included a remeasurement loss of S$12.4m relating to finance lease receivables arising from the reduction in rental rates upon the renewal of the Central Office lease agreements with the lessee from Sep 21. The strong underlining performance was driven by:
  1. a 2% y-o-y revenue growth due to higher NBAP (+52% y-o-y) and diversion income (40.1% y-o-y), and
  2. lower finance cost.
• This brings 1HFY22 core net profit to S$52.5m (+17.2% y-o-y). Accounting for 53% of our full year forecast, we deem the results to be within expectations. 1HFY22 DPU was declared at 2.56 cents (+1.2% y-o-y), in line with our expectations.
• Higher NBAP connections boosted top line. NetLink NBN Trust recorded a 52% y-o-y growth (+13% q-o-q) in NBAP connections revenue because of higher demand for point-to-point connections and Central Office-diversity connections to support mobile network rollout and other projects requiring high resiliency. In addition, diversion income also rose 40% y-o-y and 38% q-o-q, attributable to more projects completed, mainly for government agencies. The residential connection revenue remains NetLink NBN Trust’s core driver, growing 1% y-o-y as connections continue to rise (1.451m residential connections as at 30 Sep 21).
• 2QFY22 core EBITDA margin was firm sequentially but dipped 3ppts y-o-y due to lower COVID-19 related government grants.

Stable FY22 Outlook

• Key priorities include connecting more see NetLink NBN Trust as a good shelter amid market volatility given its strong earnings visibility, healthy balance sheet and cautious approach in terms of overseas/domestic acquisition approach.

NetLink - Valuation & Recommendation

• No change to our earnings approach in terms of overseas/domestic acquisitions.

• 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,
  3. investors seeking defensive yield from NetLink NBN Trust’s resilient, predictable and transparent and regulated cash flow, and
  4. earnings accertive M&As.

Source: UOB Kay Hian Research - 5 Nov 2021