SINGAPORE (Aug 8): Netlink Trust (NLT) reported 1Q20 earnings of $20.9 million, up 10% from a year ago led by higher revenue and EBITDA margin.

Revenue for 1Q20 came in at $92 million, 6.9% higher than a year ago, thanks to residential customers who were forced by StarHub’s plan to switch its cable broadband customers to fibre. However, the increase was offset by weakness in ducts and manholes segment caused by completion of unspecified projects.

Meanwhile, trends in non-residential and non-building address point (NBAP) segments continue to be lacklustre. Customer additions in the non-residential segment were weak while NBAP connections decreased 5.2% q-o-q following the completion of the government’s Smart Nation pilot project.

In an Aug 6 DBS Group Research report, lead analyst Sachin Mittal says NLT, at the 86.5-cent level, is trading at 5.7% FY20F yield, versus an average yield of 5.4% offered by large-cap industrial S-REITs.

Mittal argues that NLT should be trading at a lower yield than S-REITs as NLT’s distributions are largely independent of the economic cycle due to the regulated nature of its business.

In addition, NLT’s gearing is less than half of S-REITs’ with ample debt-headroom to fund future growth while NLT’s asset life is much longer than S-REITs as NLT incurs annual capex to replenish its regulated asset base (RAB).

Finally, higher than expected FY20F capex funded via capex reserve and debt should boost the regulated asset base which will be factored in during the next review period from 2022 onwards.

“We believe that NLT’s share price will continue to perform well amid a lower interest rate environment,” says Mittal, “Furthermore, NLT's one unique advantage over REITs and Business Trusts is that any rise in the cost of capital might lead to higher regulated returns from 2022 onwards, translating into higher distributions.”

DBS is maintaining its “buy” with a higher target price of 95 cents. Potential catalysts include StarHub’s accelerated migration to fibre, which would benefit FY19F-20F, investment in Smart Nation initiatives using its debt headroom, which had not been factored into its target price as well as clarity on NLT’s potential role in 5G rollout.

Separately, in another Aug 6 report, Daiwa Capital Markets lead analyst Ramakrishna Maruvada says NLT’s 1Q20 results came in line with the house’s expectations, which proves its business model is relatively unaffected by a worsening economic backdrop. The analyst also says NLT is on track to meet FY20 DPU forecast of 5.1 cents.


“We reaffirm our ‘buy’ rating as we continue to view several of its key investment attributes – good quality assets, predictable and resilient cash flow generation, and attractive risk-adjusted distributions relative to other ‘defensive’ stocks – in a positive light,” says Maruvada, who is lifting the target to $1.09 from 97 cents.

As at 3.31pm, units in NLT are trading flat at 88 cents on Thursday.