May 15, 2019

NetLink NBN Trust’s (NLT NBN) 4QFY19 exceeded its IPO projections across a number of metrics. Revenue was higher by 0.5% at S$87.9m, due mainly to higher contribution from residential connections revenue and ducts and manholes service revenue. EBITDA came in higher by 1.6% at S$62.8m, which apart from higher revenues, was also helped by the lower finance costs and other operating expenses. Consequently, PAT at S$20.0m was 11.7% higher than projection. Full-year DPU comes in at 4.88 S-cents, or 5.2% higher than the projected DPU of 4.64 S-cents at IPO. Based on 14 May 19’s closing price, this gives an annualised yield of 5.8%.

Management has guided that for FY20, it will be looking to incur capex higher than the ~S$71m spent in FY19, primarily to continue its regular expansion into new housing estates and to enhance resilience and flexibility in its network. In the short-term, we believe management will utilise its healthy balance sheet to lever up in order to prevent volatility in distributions. In the mid-term, a robust capex plan in building up its RAB should put NLT NBN in good stead for the next price review period, starting from 2023. In management’s opinion, a mid-term review (in 2020) is unlikely, as both the regulator and NLT NBN should be happy to let the initial price review period (2018-2022) run its course.

Much has been made of SP Telecom’s announcement to build an alternative data fibre network in Singapore. We concur with management that the short-term impact to NLT NBN is likely to be muted, given that SP Telecom’s focus is likely to be in the nonresidential space, which only forms 8.5% of the group’s FY19 revenue. According to our channel checks, we believe that SP Telecom’s reported investment of ‘hundreds of millions’ is likely to be weighted towards the intelligence capabilities of its existing fibre network, rather than launch an aggressive infrastructure rollout. We roll forward our valuations, and reduce our risk free assumption from 2.8% to 2.3% (in-line with SREITs under our coverage). All considered, our FV estimate rises from S$0.90 to S$0.95. Maintain BUY. – OCBC Investment Research

Netlink NBN Trust closed at: S$0.84