Netlink NBN Trust: Comprehensive Analysis and Financial Insights
Date: November 5, 2024
Prepared by: Maybank Research Pte Ltd
Introduction
Netlink NBN Trust (NETLINK SP) has showcased a resilient performance in the first half of FY25. Despite an 11% YoY/QoQ drop in 2QFY25 earnings, the company demonstrated stable revenue growth and maintained a strong dividend yield. This comprehensive analysis delves into the financial metrics, operating performance, and strategic positioning of Netlink NBN Trust.
2Q/1HFY25 Review: Soft on the Surface
In 2QFY25, Netlink’s earnings fell by 11% YoY/QoQ, with a 4% YoY/QoQ drop in EBITDA. However, revenue saw a 3% YoY/QoQ increase. The 1HFY25 earnings decreased by 8% YoY/4% QoQ, partly due to higher taxes and the absence of one-off gains from asset disposals recorded in 1HFY24. Despite the reported earnings decline, the company declared a 1% increase in dividends to SGD2.68 cents, translating to an attractive annual yield of 6%.
Operating Metrics – Mild Surprises but Not Concerning
Netlink posted stable RAB revenue YoY, despite a reduction in its regulated pricing from April 2024. Residential connections declined by 4K in 2Q, partly due to a reversal of a strong 17K in 1Q attributed to telcos’ promotions of 10Gbps fibre and WiFi7 router offerings. Non-residential connections also declined by 200 (-0.4% QoQ) due to churn between RLs with delayed terminations and RL consolidation. On the other hand, NBAP connections grew by 2% QoQ, supported by Smart Nation and cloud-based services linked deployments.
Cost Analysis
Operation and maintenance costs rose by 5% YoY due to increased fibre splicing costs, while installation costs surged by 44% YoY from higher residential connection orders. These cost increases are considered temporary and are expected to align with revenue growth in the future.
Maintain TP and BUY; Key Beneficiary of Interest Rate Downcycle
Netlink’s revenue and cash flows remain resilient, supported by a stable business model. The company is expected to benefit significantly from an interest rate downcycle. The stock has a 71% negative correlation to the 10-year US bond yield, while its 6% dividend yield remains highly visible and stable. The DDM-based target price remains at SGD0.97, with a BUY recommendation.
Company Description and Statistics
NetLink NBN Trust designs, builds, owns, and operates the passive fibre network infrastructure of Singapore. The company has a market capitalisation of SGD3.6B (USD2.7B) and issued shares totaling 3,897 million. Major shareholders include Singapore Telecommunications Ltd. (24.8%), M&G Investment Management Ltd. (2.8%), and The Vanguard Group, Inc. (1.9%).
Price Performance
Over the past year, Netlink’s share price has fluctuated between SGD0.82 and SGD0.94. The company’s stock price has appreciated by 6% in the past three months, driven by resilient top-line performance, good cost control, and an attractive dividend yield in a low-interest-rate environment.
Financial Metrics
- Revenue: FY23A – SGD403M, FY24A – SGD411M, FY25E – SGD418M, FY26E – SGD424M, FY27E – SGD430M
- EBITDA: FY23A – SGD291M, FY24A – SGD286M, FY25E – SGD291M, FY26E – SGD295M, FY27E – SGD298M
- Core Net Profit: FY23A – SGD109M, FY24A – SGD103M, FY25E – SGD107M, FY26E – SGD109M, FY27E – SGD111M
- Net Dividend Yield: FY23A – 6.0%, FY24A – 6.2%, FY25E – 5.5%, FY26E – 5.6%, FY27E – 5.9%
Value Proposition
Netlink operates the sole passive backbone for Singapore’s nationwide fibre network with a mandated 100% of homes passed. With a virtual monopoly, the company maintains a high EBITDA margin of 70%. Over 90% of its revenue falls under a return on asset base tariff regime based on a 7% pre-tax WACC. Residential connection revenue, following a regulated rate structure, represents the bulk of the business (62.5%). Non-residential, NBAP, and ducts and manholes services (under the RAB framework) are the next largest revenue components at 18.6% combined.
Price Drivers
Key historical price drivers include:
- FY18 profit was 6% below the prospectus estimate due to a shortfall in installation revenue.
- FY19 profit exceeded prospectus forecasts.
- The share price plunged due to market sell-down amid the COVID-19 outbreak.
- 4Q20 EBITDA declined 11.2% following a one-time write-off of capitalised project costs from a discontinued IT system replacement project.
- Share price appreciated by 6% in the past three months, likely due to a resilient top-line, good cost control, and an attractive dividend yield in a low-interest-rate environment.
Financial Metrics
Netlink Trust boasts a healthy balance sheet and free cash flow, supporting a 100% payout of its cash available for distribution. Following a capex of SGD140M in FY23, management has guided FY24E capex to be in the range of SGD140-150M, expected to be the run rate until FY26E.
Swing Factors
Upside
- Stronger-than-expected demand may enable Netlink to increase its regulated capex, providing additional guaranteed returns.
- Acceleration of office decentralisation from CBD areas could boost growth in non-residential connections.
- Higher-than-expected residential household broadband penetration rate.
- Market risk-aversion could boost investment interest in Netlink due to its defensive and stable business.
- Low-interest-rate environment could lead to yield compression for Netlink.
Downside
- Reduction in the regulated returns for the next review period could impact long-term fair value.
- Pricing competition in the non-residential segment.
- Rising interest rate cycle would reduce the attractiveness of dividend-yielding stocks such as Netlink.
ESG and Sustainability
Netlink Trust has established robust ESG policies and targets. The company has quantitative disclosures on ‘E’ parameters on emissions and resource usage, as well as ‘S’ parameters on workforce and management diversity. The overall ESG score is 55, indicating an above-average rating.
Environmental Issues
- Generated and disposed of an average of 0.44% of fibre scraps against fibre cables issued, below its 2.5% FY21 target.
- Recovered 391.4 tonnes of fibre cables from cable diversion, which were disposed of at National Environment Agency-approved facilities for incineration.
- Invested SGD0.85M in FY20 to replace fan coil units in co-location rooms, improving energy efficiency by 30%.
- Plans to roll out more initiatives across co-location rooms to reduce energy consumption, such as the “blanking” project.
Governance Issues
- Awarded “Most Transparent REITs & Business Trust” by SIAS 20th Investors’ Choice Awards in 2019.
- The board consists of eight directors, with a strong representation of independent directors (75%) and female directors (25%).
- The nominating, audit, and remuneration committees are chaired by independent directors.
- Professional backgrounds of independent directors include accounting, banking, consultancy, and law.
- Total remuneration of CEO and top five key management personnel amounts to SGD4.3M, or 5.5% of FY20 PAT and 15.5% of staff cost.
- Independent auditor is Deloitte & Touche LLP since listing in 2017.
Social Issues
- Achieved 5,413 learning hours with an average of 15.4 learning hours per employee.
- Zero incidents of discrimination during FY19.
- Zero work-related incidents resulting in fatalities or permanent disabilities.
- Staff turnover rate of 17.7%, higher than the high-tech industry norm of 15.9%.
- Aims to achieve an annual employee turnover rate lower than the industry norm by investing in skills development and internal capabilities.
- 71:29 male to female employee ratio, with females making up 36% of “managers and executive” category.
- 64% of the workforce is between 30 and 50 years old.
Quantitative and Qualitative Parameters
The company’s overall ESG score is derived from both quantitative and qualitative parameters, with scores indicating the company’s performance and sustainability initiatives.
Quantitative Parameters
- Scope 1 emissions: 619 tCO2e
- Scope 2 emissions: 344 tCO2e
- Scope 3 emissions: 33,372 tCO2e
- Total hazardous and non-hazardous waste: 487 tons
- Percentage of fibre waste generated in proportion to total fibre cable issued: 1%
- Percentage of women in the workforce: 31%
- Percentage of women in management roles: 25%
- Number of reported work injuries: 0
- CEO salary as a percentage of net profit: 1.98%
- Independent directors on board: 63%
- Women directors on board: 25%
Qualitative Parameters
- ESG policy in place with a Board Sustainability Committee chaired by the CEO.
- KPIs, business objectives, governance enablers, and risks for each segment.
- Senior management salary not linked to fulfilling ESG targets.
- Company follows TCFD framework for ESG reporting.
- Mechanism to capture Scope 3 emissions.
Target and Achievements
- 50% reduction in Scope 1 and 2 GHG emissions by 2030: Target – 50%, Achieved – 0%
- Maintain 100% island-wide coverage: Target – 100%, Achieved – 100%
- Zero incidents of significant non-compliance with laws and regulations: Target – 0, Achieved – 0
- Limiting the percentage of fibre scraps disposed to total fibre issued to less than 2.5%: Target – 2.5%, Achieved – 1.0%
- Maintain zero work-related incidents: Target – 0, Achieved – 0
Detailed Financial Analysis
Summary of 2QFY25 Results
| Metrics |
2QFY24 |
1QFY25 |
2QFY25 |
YoY |
QoQ |
| Revenue |
101,381 |
100,915 |
103,929 |
3% |
3% |
| EBITDA |
73,897 |
73,380 |
70,136 |
-4% |
-4% |
| Margins |
72.9% |
72.7% |
67.5% |
– |
– |
| D&A |
-43,277 |
-43,835 |
-43,658 |
0% |
0% |
| Finance costs |
-4,669 |
-4,495 |
-4,545 |
1% |
1% |
| NPAT |
24,644 |
25,663 |
22,827 |
-11% |
-11% |
Operating Details
| Metrics |
2QFY24 |
1QFY25 |
2QFY25 |
YoY |
QoQ |
| Residential connections (000) |
1,492 |
1,524 |
1,520 |
1% |
0% |
| Non-Residential connections (000) |
52.6 |
53.4 |
53.2 |
0% |
-0.4% |
| NBAP |
2,823 |
2,944 |
3,011 |
3% |
2% |
| Segment connections |
3,218 |
3,646 |
3,774 |
11% |
4% |
1HFY25 Financial Summary
| Metrics |
1HFY24 |
2HFY24 |
1HFY25 |
YoY |
HoH |
| Residential connections |
123,310 |
124,232 |
123,322 |
0% |
-1% |
| Non-residential connections |
16,506 |
16,946 |
16,924 |
3% |
