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'Buy' NetLink for resilient 1H21 earnings, fibre network potential: analysts

Jovi Ho
Jovi Ho11/11/2020 02:18 PM GMT+08  • 4 min read
'Buy' NetLink for resilient 1H21 earnings, fibre network potential: analysts
GS-CIMB, OCBC Investment Research, Maybank Kim Eng and UOB Kay Hian are maintaining their ‘buy’ or ‘add’ calls on the company.
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Following resilient earnings reported in 1HFY2021, four in five brokerages are recommending investors to accumulate units in NetLink NBN Trust (NetLink Trust).

On Nov 1, NetLink NBN Trust declared distribution per unit (DPU) of 2.53 cents for the 1HFY2021, up 0.4% from the 2.52 cents posted a year ago. The increased DPU comes on the back of 1HFY2021 earnings of $44.8 million, up 1.5% from the $44.1 million registered in 1HFY2020.

NLT designs, builds, owns and operates the fibre network infrastructure which is the foundation of Singapore’s Next Generation Nationwide Broadband Network.

See: NetLink NBN Trust declares 0.4% higher 1H DPU of 2.53 cents

CGS-CIMB, OCBC Investment Research, Maybank Kim Eng and UOB Kay Hian are all maintaining their ‘buy’ or ‘add’ calls on the company. Only DBS Group Research differ, maintaining ‘hold’ on the company with a target price of $1.02.

“We are more conservative in our valuation,” say DBS Group Research analysts Sachin Mittal and Lim Rui Wen in a Nov 10 note. “We expect annual capex to hover between $55 to $60 million in the long term and any potential acquisition or rise in capex could be a positive surprise. Any reduction in regulatory WACC in the next review period could be a negative surprise.”

Mittal and Lim note that the 2QFY2021 results recorded a one-off tax surprise. “2QFY2021 revenue $94.1 million (-2% y-o-y/ +4% q-o-q) and net profit at $21.3 million (-8% y-o-y/ -9% q-o-q) were broadly inline except for the tax deduction of $3.1 million.”

1HFY2021 revenue was lower by 2.5% y-o-y due to lower installation-related revenue, note the analysts. This is in comparison to FY2020, which saw Starhub customer migration contributing strongly to installation-related revenue. 2QFY2021 EBITDA margin improved to 75.4% (2Q19: 73.0%) due to higher proportion of revenue from residential connections and government relief grants received.

Covid-19 also impacted operations earlier this year. During the quarter, lower availability of contractors affected diversion revenue due to stoppages of works nationwide, while ducts and manholes revenue saw lower completion of joint projects with requesting licensees and reduction of leasing revenue from NetLink Trust’s ducts. Diversion revenue will continue to be spread over the next six to nine months as some construction works are being pushed back, say Mittal and Lim.

More optimistic are OCBC Investment Research, Maybank Kim Eng and UOB Kay Hian, who recommend ‘buy’ with target prices $1.10, $1.11 and $1.08 respectively. CGS-CIMB is recommending ‘add’ with a target price of $1.10.

CGS-CIMB analyst Ong Khang Chuen notes that NLT continued to see growth in all three types of fibre connections, and we believe the current growth trajectory is sustainable. Its residential segment reached 1.44 million connections in 2QFY21 (+0.6% q-o-q, +1.9% y-o-y) as NLT reached more new homes and added connections to low-income households via initiatives such as IMDA’s Home Access programme.

Non-residential connections resumed growth to 476,000 (+1.3% q-o-q) after a dip in 1QFY21, which saw the circuit breaker impacting new additions. The non-building address point (NBAP) segment saw the fastest connection growth to 1,847 (+4.2% q-o-q, +17.7% y-o-y) as NLT supplemented local telcos’ rollout of 5G infrastructure, he adds.

In its investment thesis on NetLink Trust, OCBC Investment Research analysts note the growing prominence and potential of the company. “With the increasing usage of fibre broadband services for day-to-day activities driven by growing demand for connectivity and rapid broad-based growth in data consumption, we believe NLT NBN has a resilient business model, and hence able to weather through various economic cycles given the defensive nature of its income streams.”

“Furthermore, we expect NLT NBN to be a key participant of growth in other connected services within the non-residential and NBAP space, especially with Singapore’s push to transform into a digital economy.”

As at 2.01pm, shares in NetLink Trust are trading at 0.5 cents lower, or 0.51% down, at 97 cents.

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