NetLink Trust kept at 'buy' by 5 houses on earnings visibility and 5G potential

SINGAPORE (Nov 6): All five research reports sighted by The Edge Singapore this week have maintained their “buy” calls on NetLink NBN Trust (NetLink Trust) after its 2Q20 results announcement on Nov 1.

UOB KayHian, Maybank KimEng, Phillip Securities, OCBC Investment Research and DBS Group Research like NetLink Trust’s good earnings visibility, attractive dividend yields, and earnings growth potential from Singapore’s 5G rollout.

To recap, NetLink Trust reported a 3.3% rise in 1H20 DPU to 2.52 cents from 1H19 DPU of 2.44 cents given higher 2Q20 earnings on the back of robust residential connections and good cost discipline.

Revenue and other income for 2Q20 rose 3.8% to $94.07 million and 26.8% to $0.98 million from a year ago respectively but total expenses fell 2.2% to $72.8 million. This resulted in profit before income tax coming in 31.7% higher at $22.1 million.

NetLink’s 2Q20 revenue contribution from residences surged 14% y-o-y as fibre connections also surged at the same rate to 1.4 million. However, non-residential fibre connections saw flat growth, expanding just 3% y-o-y to 46,742 while revenue contribution grew 4% y-o-y and 1% q-o-q. Meanwhile, non-building access point (NBAP) connections grew 23% y-o-y and 4% q-o-q to 1,569, while revenue contribution from this segment surged 7% y-o-y and 1% q-o-q.

With a near 50% fall in income tax credit, 2Q20 earnings also came in 24.1% higher at $23.2 million or 0.59 cent per unit. EBITDA increased 12.1% y-o-y to $68.7 million on the back of higher revenue and lower installation costs and other operating expenses although this was partially offset by higher staff costs.

In a Monday research report, UOB lead analyst Chong Lee Len says, “We deem the 1H20 results to be within expectations, accounting for 55% of our FY20 net profit forecast of $81 million.”

“We like the stock for its good earnings visibility, attractive dividend yields, and earnings upside as NetLink Trust stands to benefit from 5G roll-out,” adds Chong, who has a target price of $1.01.

In its FY20 outlook, NetLink Trust’s trustee-manager expects revenues from key connection services to be higher than FY19 mainly due to higher residential connections and installation-related revenues.

The trustee-manager also says it will continue to invest and expand its network to improve the network’s capability and resiliency but expects capital expenditure in FY20 to be higher than that of FY19.

The trust will also support IMDA’s objectives to achieve pervasive deployment of 5G infrastructure and grow the 5G innovation ecosystem. As a start, the group will be supporting M1 for its 5G trial at an upcoming new restaurant in Marina Square and TPG Telecom for its 5G trial network across Singapore Science Park I and II.

In a separate Monday report, Maybank says NetLink Trust’s 1HFY20 revenues came in at 50% of its in-house and consensus FY20 earnings with growth driven by residential connections as StarHub completed its cable to fibre migration in 2Q20.

According to Maybank, NetLink Trust’s trustee-manager has indicated that installation revenue will be part of FY20E revenue growth. This means costs will likely increase in 2HFY20 and dilute margins given this is a “lower margin segment”.

Maybank has target price of $1.06.

Phillip is also maintaining its "accumulate" with higher 99-cent target price.

In a Monday report, analyst Alvin Chia says he is increasing his FY21F EBITDA by 1% reflecting the stronger demand for NetLink Trust’s fibre for the 5G rollout.

"NLT is our favourite pick in the telecommunications sector due to its resilient business model and an attractive distribution yield of 5.6%," says Chia.

OCBC also says NetLink Trust’s 2Q20 results came broadly in line with its expectations.

With the increasing usage of fibre broadband services for day-to-day activities, OCBC says NetLink Trust 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," says OCBC who has a fair value of $1.03.

In a Monday report, DBS says NetLink Trust’s FY20F yield of 5.8% is attractive compared to the average 5.0% yield by large-cap industrial S-REITs.

This is despite DBS's own argument that NetLink Trust should trade at a lower yield than S-REITs as the life of its assets is much longer than S-REITs; the trust’s gearing is less than half of S-REITs’; and NetLink Trust’s distributions are largely independent of the economic cycle.

DBS has a target price of $1.04 or 44 times FY20F earnings.

As at 12.20pm, units in NetLink Trust are up 1 cent at 96 cents.