• Results were within expectations — strong growth of 4.2% QoQ in residential connections.
• The number of NBAP connections decreased by 5.2% QoQ due to the review of the Smart Nation Sensor Platform programme.
• EBITDA margin is higher due to the adoption of SFRS (I) 16. We have incorporated the new accounting standard into our model.
• Maintain ACCUMULATE with an unchanged target price of S$0.93. Our valuation is based on DCF (WACC 6%, Terminal growth 1%).

The Positives

+ Healthy growth in residential connections and installation revenue. Residential end-user connections grew 4.2% QoQ (+14% YoY) to 1.38mn. The on-going migration of StarHub’s hybrid coaxial cable (HFC) subscribers to fibre supported growth. Installation revenue grew on the back of higher residential installation-related revenue and service activation charges for new fibre customers. The deadline for the migration exercise is extended to 30 September 2019. We expect the migration exercise to contribute to growth in the residential segment. Upon completion, growth should return to a more stable level, sustained by new housing estates.  There are approximately 150,000 households without fibre connection. We maintain our 10% growth estimate for the residential connection segment in FY20e. 

The Negatives

– NBAP connections disappointed. The number of NBAP connections decreased by 5.2% QoQ to 1,505. This is due to the review of the Smart Nation Sensor Platform (SNSP) programme by GovTech. These connections are part of phase 1 SNSP which started in 2015. Management said that the termination does not signal a cooling off in smart nation initiatives as they reiterated more positive demand in FY20e. NBAP connections contribute ~2% of total revenue.

Outlook

Management guided higher residential connections and installation-related revenues in FY20e. We expect NBAP to benefit from smart nation initiatives like the developments in Punggol Digital District, Jurong Innovation District and the roll-out of TPG Telecom’s 4G network.  We believe NLT will benefit from the roll-out of 5G be it on a single wholesale network or two standalone networks.

Maintain ACCUMULATE with an unchanged TP of S$0.93.

We have incorporated the new accounting standard SFRS (I) 16 into our financial model.  Our valuation is based on DCF (WACC 6%, Terminal growth 1%). We like NLT for its resilient business model and its attractive yield of 6%.

Source: Phillip Capital Research - 6 Aug 2019