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Broker's Digest: Spotify, NetLink NBN Trust, TDCX, iX Biopharma, StarHub

The Edge Singapore
The Edge Singapore • 10 min read
Broker's Digest: Spotify, NetLink NBN Trust, TDCX, iX Biopharma, StarHub
See what the analysts have to say this week.
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Price target:
PhillipCapital ‘buy’ US$117.00

Pricing power drives growth

PhillipCapital is initiating a “buy” recommendation on audio streaming platform Spotify with a target price of US$117.00 as analyst Jonathan Woo likes it for its growing base and pricing power that is expected to drive future revenue growth.

Spotify has consistently seen growth in its revenue and user base, as it more than trebled from FY2016 ended December 2016 to FY2021.

The platform’s premium revenue, which drives over 90% of revenue growth, has grown about 22% y-o-y in 2QFY2022 to EUR2.5 billion ($3.5 billion), leveraging from the conversion of monthly active users (MAUs) into premium subscribers.

Woo has also noticed that Spotify is the leader in the global streaming market, with a 31% market share, and boasts the largest library of audio content across formats like music, podcasts and audiobooks. The industry, he reckons, is expected to increase at a 9% CAGR until FY2025. “We expect the company’s continued ability to convert existing MAUs into premium subscribers through its engaging content, coupled with increasing subscription prices – as demonstrated by rising average revenue per user (ARPU) (6%y y-o-y), to drive revenue growth of about 54% over the next two years,” says Woo.

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The group’s premium monthly subscription translates to a steady recurring revenue. Woo has also noticed that premium revenue has grown over the last five years at a 26% CAGR, largely due to a 130 million jump in subscribers.

“With churn levels improving y-o-y, premium revenue continues to be a base of resilient revenue generation for Spotify, even amidst a weaker macroeconomic environment this year,” says Woo.

Spotify’s ARPU saw an inflexion point in 1QFY2021 and has since been steadily improving at 5% to 6% y-o-y, as a result of increasing subscription prices, which Woo expects will continue trending upwards.

See also: PhillipCapital initiates ‘buy’ call on CSOP iEdge S-REIT ETF with TP of 87 cents

“Spotify’s ability to add subscribers and incrementally raise prices at the same time should allow the company to expand their resilient base of premium revenue further,” adds the analyst.

Meanwhile, gross margins as at FY2021 stood at 27%, increasing about 1.5% y-o-y, with management reiterating its goal of achieving 35% to 40% gross margins soon as revenue per listening hour continues to outpace cost per listening hour.

Additionally, Spotify remains focused on growing its higher-margin ad revenue (12.5% of revenue) and expanding its non-music content (like podcasts and audiobooks), to create more ad-placement opportunities for advertisers. “We expect this focus on growing ad revenue to help overall margin expansion moving forward,” says Woo. — Samantha Chiew

NetLink NBN Trust
Price target:
Maybank Securities ‘hold’ $1.00

Losing attractiveness as a dividend play

With strong earnings visibility and stability, NetLink NBN Trust (NetLink Trust) is a defensive play amid the current backdrop of rising inflation and a potential economic slowdown, says Maybank Securities Research analyst Kelvin Tan.

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That said, ongoing regulatory fibre pricing review remains a key overhang, adds Tan, and NetLink Trust is losing attractiveness as a dividend-yielding haven.

NetLink Trust designs, builds, owns and operates the passive fibre network infrastructure of Singapore. In an Oct 4 note, Tan is maintaining this “hold” call with a target price of $1.00, which represents a 10% upside.

“On the back of inflationary pressures and higher interest rates, Netlink Trust’s financial costs are well-hedged, with 76% of debt fixed at 1% until May 2026,” writes Tan.

However, modest growth in distribution per unit (DPU) reduces the attractiveness of NetLink Trust as an income-yielding investment. NetLink Trust’s dividend spread over bond yields and other interest-yielding assets have not widened since interest rates started to climb this year, Tan adds.

NetLink Trust operates the sole passive backbone for Singapore’s nationwide fibre network with a mandated 100% of homes passed. As it has a virtual monopoly, ebitda margin is high at 70%, notes Tan. “More than 90% of revenue falls under a return on asset base (RAB) tariff regime based on a 7% pre-tax weighted average cost of capital (WACC). Tariffs are set over a five-year period with the current rate lasting until December.” Residential connection revenue, which follows a regulated rate structure, represents the business’s bulk (about 62.5%).

On the ESG front, Tan has assigned NetLink Trust an ESG score of 55 “based on its aggregated quantitative, qualitative and target-based metrics”.

“NetLink Trust provides fibre network services. This exposes it to environmental risks. In particular, energy is consumed to provide power to co-location rooms but NetLink Trust has no direct control over energy consumed by its customers’ equipment,” writes Tan.

It is also exposed to data centres’ environmental risks, as many Singapore data centres, in the middle of their lifespan, were designed without sustainability and energy conservation in mind. That said, the trust has no direct control over its customers’ power consumption, adds Tan.

In FY2020, NetLink Trust invested $0.85 million to replace fan coil units in co-location rooms to improve the energy efficiency of the cooling system by 30%. Meanwhile, the staff turnover rate of 17.7% is higher than the high-tech industry’s norm of 15.9%.

NetLink Trust’s CEO and top five key management personnel remuneration amount to $4.3 million, or 5.5% of FY2020 profit after tax and 15.5% of staff cost. NetLink Trust’s independent auditor has been Deloitte & Touche since its listing in 2017. — Jovi Ho

Price target:
JP Morgan ‘overweight’ US$13.80

Profitable compounder

JP Morgan is initiating coverage on digital customer experience (CX) solutions company TDCX with an “overweight” rating and a target price of US$13.80 ($19.72), implying a 49% upside from its current share price of US$9.26, as at Oct 3.

The target price is derived at an EV/Ebitda multiple of 9.5x, which is at a premium to peers driven by its higher profitability and growth.

JP Morgan Analysts Ranjan Sharma, Sigrid Qiu and Gabriella J Hidayat view the group as a profitable CX play on growth in the new economy.

“We believe TDCX’s roster of industry leaders presents a strong growth outlook driven by an increasing trend to outsource CX services; rising penetration within existing clients, and growth in clients underpinned by its track record with the industry leaders,” say the analysts.

TDCX’s client number increased by over 60% from 2020 to the second quarter of 2022. With that, the analysts expect revenue to show a 15% CAGR from FY2021 ended December 2021 to FY2024.

The analysts also like TDCX for its industry-leading profitability compared to peers. TDCX has higher profitability with an ebitda margin of over 25%, compared to peers that are below the 25% mark. For 2021, the group also had an Ebitda/headcount of about US$10,200, compared to peers’ US$3,000 to US$9,600.

“The higher profitability is driven by: a focus on the new economy; a higher proportion of complex workload; wage cost advantage from operating primarily in Southeast Asia; and industry-low attrition rates,” say the analysts, who note that talent management is a moat for the group’s business.

They also believe that the group is well-placed for potential M&As.

With TDCX converting more than 10% of its revenues into free cash flows (FCFs), its net-cash position could swiftly grow to over 30% of its current market cap by the end of 2024. As at Oct 3, TDCX’s market cap stood at US$1.35 billion.

“In our view, this raises prospects of M&A where TDCX could expand its services and/ or its geography. TDCX has been evaluating M&A opportunities, per management,” say the analysts.

Despite the generally bright outlook, the analysts have pointed out competition and macro as key risks for TDCX.

The group currently has a 3% stake in a highly competitive and fragmented industry. Its focus on human capital has underpinned its industry-low attrition rates at 25%, compared to the industry average of 30% to 34%, but competition remains a key risk.

Macro risks also include wage inflation and potential weakness in consumer spending impacting its clients. Furthermore, the founder’s 98% voting rights (84% stake) limit the say of holders of Class A shares in corporate affairs and material transactions.— Samantha Chiew

iX Biopharma
Price target:
PhillipCapital ‘buy’ 25 cents

Uncertainty from new pipeline of drugs

PhillipCapital’s head of research Paul Chew has maintained his “buy” call on iX Biopharma but has lowered his target price by almost 30% from 35.5 cents to 25 cents.

Writing in a Sept 30 report, Chew explains that prospects for the company are highly dependent on development milestone payments and sales royalties from the drug Wafermine, which is used for complex regional pain syndrome (CRPS).

He notes that the annuity stream from milestone and royalty payments of Wafermine is on track, with out-licensing partner Seelos Therapeutics planning Phase 2 trials for CRPS in 2QFY2023 ending June 2023.

However, he says that “there is a high level of uncertainty” over these cash flows as it assumes completion of drug trials and successful sales of Wafermine.

Separately, the company has also expanded its pipeline of drugs by developing a sublingual wafer, which refers to a drug that is applied under the tongue, that contains dexmedetomidine to treat multiple indications, including Alzheimer’s disease-related agitation.

Dexmedetomidine was initially approved as an intravenous infusion (IV) by the US Food and Drug Administration (FDA) as a sedative medication but Chew says the drug formulation for the sublingual form has been completed and a Phase 1 human study is underway with results due this December or January 2023.

The group’s other developments include the signing of a supply agreement with China Resources Pharmaceutical Commercial Group (CRPCG) for the drug Wafesil, which is used for the treatment of male erectile dysfunction. CRPCG is responsible for obtaining the marketing authorisation for Wafesil in China. There will be upfront and licensing fee payments before the commercialisation of Wafesil.

“We expect filling with the Chinese regulators to be conducted by 1QFY2023. iX Biopharma is also looking at the distribution of Wafesil in other countries,” says Chew.

Meanwhile, the group is also planning to market its medicinal cannabis product Xativa in other markets, like the US and the UK although regulatory approval in the UK was delayed due to the pandemic. Xativa is currently sold in Australia with a prescription in a variety of dosage strengths, and Chew expects more product enhancements, including combining it with other nutraceutical ingredients. — Lim Hui Jie

Price target:
Maybank Securities ‘buy’ $1.32

Reopening play

Maybank Securities is upgrading its call on local telco StarHub to “buy” from “hold” with an unchanged target price of $1.32, as analyst Kelvin Tan sees tailwinds for the group from the economy reopening.

“StarHub remains on track with its Infinity Play and superapp strategies that will see the creation of new revenue streams. Roaming revenue is improving and it would be in a good position to capture business opportunities from the re-opening of China’s economy,” says Tan, who sees any pullback as an opportunity to “accumulate”.

Tan believes that the group is on track to beat its guidance and continue offering a 4% sustainable annualised dividend yield.

StarHub has previously mentioned that its DARE+ transformation will position it better to capture growth from new trends in the market. But in a previous interview with The Edge Singapore, CEO Nikhil Eapen also said that FY2021 ended December 2021 and FY2022 would be the years that the group will front-load its expenses and costs for this transformation.

After FY2022, Eapen expects the group to be on an upward trend as its transformation will allow it to better capture opportunities for growth.

“We acknowledge that FY2022 will be a transition year for StarHub to undertake the necessary investments into new growth areas under the DARE+,” says Tan, who expects opex to rise further in 2HFY2022 from IT outsourcing, EPL content, software licensing and 5G wholesale cost.

“Unless roaming revenue gains further momentum or new revenue begins to contribute meaningfully, we think earnings will be sluggish in 2HFY2022. We thus expect ebitda margin to drop from 24.6% in 1HFY2022 to 17.4% in 2HFY2022,” adds Tan.— Samantha Chiew

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