• NetLink’s 1HFY23 PATMI rose 36.1% y-o-y to S$54.6m, ahead of MIBG/consensus expectations, accounting for 56%/55% of the respective FY23 forecasts. The increase was mainly due to a surge in ancillary project revenue (+163% y-o-y).
• In our view, NetLink’s short-term negatives are likely priced in, and the sharp decline in NetLink Trust's share price appears to have fully factored in the anticipated interconnect rate cuts while discounting estimates.

Segment Connections Drive Non-RAB Revenue

• This was partially offset by lower Central Office revenue (-13.4% y-o-y to S$4m) on a drop in rental space that reduced rental income.
• Residential connection revenue remains the largest contributor to the group at 62% of revenue. As at end of Sep 2022, there were 1.47m (+0.3% q-o-q) residential connections, 51.6k (+1.6% q-o-q) non-residential connections, 2.56m (+3.1% q-o-q) NBAP connections and 2.43m (+12% q-o-q) segment connections completed.

Good Opportunity to Accumulate at Current Level

• With an ICO pricing decision being finalise by IMDA in 1H23, we think NetLink's management has the opportunity to justify a higher rate of return as planned capital expenditure (RAB) and WACC under consideration will be higher in the current rising rate environment.
• With better performance and higher expected returns, we have increased our FY23F/24F PATMI forecasts for NetLink by 3.3%/3.4%. We believe NetLink offers value at the current level with a 6% sustainable dividend yield.

Downside Risks Are Mitigated

• We think soaring interest rates remain a pivotal risk to the performance of NetLink Trust's share price as the yield gap between NetLink’s dividend yield and 10-year Singapore rates is below mean. This, in our opinion, is unlikely to impact the forecasted dividend payout (+0.9pp y-o-y) in FY23 as NetLink's net gearing stood at 18.6% as of end-Sep which provides good debt headroom for higher borrowings to tide through any near-term shortfall.
• Upgrade NetLink from HOLD to BUY with a higher target price of S$1.02 (up from S$1.00) leaving 17% upside, and a healthy 6% FY23E dividend yield.

Source: Maybank Research - 3 Nov 2022