• Revenue and EBITDA were marginally below our expectations. Project-related installation and diversion revenue was lighter than expected.
• Growth in residential revenue has peaked. The migration of Starhub customers from cable to fibre has been ended. Net addition of residential fibre in 2Q20 was the slowest since listing.
• NBAP is an exciting opportunity as 5G rolls out in Singapore, but any material contribution will be several years ahead.
• There is no change to the attractive utility type revenues of NetLink. Nevertheless, we are downgrading to NEUTRAL from ACCUMULATE due to the recent share price run-up. Our target price is unchanged at S$0.99. Growth will be more sanguine as the migration from cable to fibre has completed.

The Positives

+ Recurrent residential revenue growing, albeit more modestly. Residential revenue rose almost 13%, supported by residential fibre connections growth of 10.7% YoY to 1.42mn. Net addition of 10.5k fibre connection in 3Q20 was the slowest in nine quarters (i.e. since listing). Residential revenue accounts for 64% of total revenue, the highest since listing.

+ Non-residential gaining some momentum. Non-residential connections rose by 3.7% YoY to 47,408. On a quarterly basis, the net addition of 666 connections is the highest in four quarters. Government agencies and small & medium enterprises are the targeted segments for NLT.

The Negative

­– Clearer signs of decline in ducts and manhole revenue. This category accounts for 8% of total revenue. Revenue has been trending down from S$9.3mn per quarter last year to currently S$7.6mn.  There is two parts to the revenue – (i) joint-build project work with Singtel to build new ducts; (ii) contractual revenue from Singtel for copper and fibre cables placed in these ducts. The decline is due to NLT building the ducts themselves and Singtel removing their older copper wires from the ducts.

Outlook

NLT remains a utility with several growth drivers. Longer-term growth will be supported by higher capital expenditure, continuous household formation, 5G rollout and Smart Nation initiatives.

Downgrade to NEUTRAL with unchanged TP of S$0.99.

The run-up in share price to our target price is the main rationale for our downgrade. NLT offers an attractive yield of 5.1% that is well supported by captive recurrent revenues. However, we currently find limited catalyst to raise our target price. 

Source: Phillip Capital Research - 14 Feb 2020