Overview of Netlink NBN Trust

Netlink NBN Trust is a key player in the passive fiber network infrastructure of Singapore, owning and operating the only nationwide backbone for the country’s fiber network. With a market capitalization of SGD 3.3 billion, the trust is uniquely positioned due to its monopoly on this essential service. The company boasts a strong EBITDA margin of 70%, bolstered by a return-on-asset-based tariff regime with a pre-tax WACC of 7%.

The company’s income is predominantly derived from residential connection revenues, which represent 62.5% of its total revenue. Non-residential, NBAP (non-building address points), ducts, and manholes services contribute an additional 18.6%. These services fall under the RAB (Regulated Asset Base) framework, ensuring stability and predictability in earnings.

Financial Performance and Key Metrics

Netlink’s financial performance in 3QFY25 displayed mixed results. Earnings grew by 12% quarter-on-quarter (QoQ) but declined 20% year-on-year (YoY). Revenues dipped by 1% YoY and QoQ, attributed to reductions in regulated pricing effective from April 2024. EBITDA showed a modest 5% QoQ growth but was still 8% lower YoY. The 9MFY25 earnings are trending at 69% of Maybank IBG’s estimates, while revenues and EBITDA are in line at 74-75%.

Despite these challenges, Netlink remains a robust investment due to its stable business model. The trust’s 6% dividend yield is highly visible and resilient, making it an attractive option for income-focused investors. The company’s strong negative correlation of 71% with the 10-year US bond yield positions it as a beneficiary of any potential interest rate cycle adjustments.

Operating Metrics and Growth Drivers

Residential connections declined by 3,000 in 3QFY25, following a strong 17,000 increase in 1QFY25 due to telco promotions involving 10Gbps fiber plans and WiFi7 routers. Non-residential connections increased by 300 or 1% QoQ, reversing a downward trend from previous quarters. NBAP connections posted a 2% QoQ growth, supported by Smart Nation initiatives and cloud-based deployments.

Segment connections have also maintained momentum, increasing by 2% QoQ. The consistent growth in NBAP and segment connections underscores the company’s resilience and the growing demand for its services in Singapore’s digital economy.

Dividend Stability and Growth Potential

Netlink’s dividend yield of 6% remains a cornerstone of its investment appeal. The trust’s stable cash flows and healthy balance sheet ensure its ability to sustain a 100% payout of distributable cash. With a DDM-based target price of SGD 0.97, representing a 13% upside from its current price of SGD 0.86, Maybank Research maintains a “BUY” recommendation on the stock.

The company’s capex guidance for FY24 stands at SGD 140-150 million, consistent with the previous fiscal year. This level of investment is expected to continue through FY26, further supporting its growth and operational stability.

Environmental, Social, and Governance (ESG) Highlights

Netlink has integrated ESG considerations into its operations and governance. Key environmental initiatives include maintaining fiber scraps below 2.5% of total issued fiber cables and implementing energy-efficient cooling systems in co-location rooms. The company has also adopted the TCFD framework for ESG reporting and has set a target to reduce Scope 1 and 2 GHG emissions by 50% by 2030.

On the social front, Netlink has achieved zero work-related incidents and has invested significantly in employee training, logging 5,413 learning hours in FY19. The board composition reflects strong governance practices, with 75% of directors being independent and 25% being female.

Risks and Challenges

While Netlink’s business model is robust, it faces potential risks, including reductions in regulated returns during the next review period and pricing competition in the non-residential segment. A rising interest rate environment could also impact the attractiveness of its dividend yield. However, the company’s defensive nature and stable cash flows make it a reliable investment in volatile markets.

Key Financial Projections

Maybank Research provides the following key projections for Netlink NBN Trust:

• Revenue: Expected to grow modestly from SGD 417.9 million in FY25E to SGD 430.1 million in FY27E.
• EBITDA: Projected to increase from SGD 290.7 million in FY25E to SGD 297.8 million in FY27E.
• Core Net Profit: Estimated to rise from SGD 107.4 million in FY25E to SGD 110.8 million in FY27E.
• Dividend Yield: Expected to remain stable at approximately 6% through FY27E.

Conclusion and Recommendation

Netlink NBN Trust offers a unique investment opportunity with its monopoly in Singapore’s passive fiber network infrastructure. Despite short-term challenges in regulated pricing, the trust’s stable cash flows, high dividend yield, and growth potential make it a compelling choice for investors. Maybank Research reiterates its “BUY” rating with a target price of SGD 0.97, reflecting a 13% upside.