Can Netlink Trust tap on the new 5G network?

With the impending rollout of the 5G technology, investors are undecided on how it will impact Netlink NBN Trust (“NLT” in short) going forward.

  • NLT’s extensive network provides nationwide coverage in Singapore
  • FY2019 profit before tax up 25.8% against projected profits
  • Distribution yield of 5.5% based on share price of S$0.89
  • Singtel is the biggest shareholder with a sizable 24.79% interest
  • NLT is monitoring the development of the 5G network in Singapore

The upcoming 5G technology has been the recent talk of the town as it would provide super-fast internet access for consumers and power a whole host of industrial applications, allowing for a smarter and more connected world.

For Singapore, the Infocomm Media Development Authority (IMDA) is already aiming to deploy at least two nationwide 5G networks as early as next year and currently reaching out to the interested mobile network operators (currently Singtel, StarHub and M1) for their detailed proposals.

Given that the close connection between the mobile network operators and fibre network infrastructure provider Netlink NBN Trust (SGX: CJLU), we zoom into the company for a more thorough analysis.

Company Background

Sourced from TodayOnline

NetLink NBN Trust (“NLT” in short) was listed on the Main Board of the Singapore Exchange Securities Trading Limited on 19 July 2017. It is a constituent of the FTSE ST Large & Mid Cap Index and the MSCI Global Small Cap – Singapore Index.

As its name suggests, NLT designs, builds, owns and operates the fibre network infrastructure which forms the foundation of Singapore’s Next Generation Nationwide Broadband Network (“Next Gen NBN”), over which ultra-high-speed internet access is delivered throughout mainland Singapore and its connected islands.

In short, NLT’s extensive network provides nationwide coverage to residential homes and non-residential premises in Singapore through the various Internet Service Providers such as Singtel, M1, Starhub, MyRepublic etc.

You can also catch up on NLT’s annual report 2018 here.

Netlink Trust’s Financial Highlights

As NLT is a newly listed company, its best to compare the latest earnings results to its projected figures stated in the prospectus.

As of 10Jul2019 | Sourced from Netlink NBN Slides

From the picture above, we can see that NLT has surpassed its projections soundly. Revenue was up 3.3% higher than its projected S$342.2 million mainly due to higher residential connections revenue.

Profit before tax also came in higher at S$69.75 million, a jump of 25.8% compared to its projected profits. This stellar outperformance is due to the increased revenue coupled with lower depreciation, amortisation and finance charges.

Given that Netlink Trust is a business trust, most investors would be more keen in knowing how its dividends stack up.

Sourced from Netlink Trust’s financial reports

From the table above, we pull out the cash available for distribution (“CAFD”) from NLT’s financial reports and saw that its CAFD has increased significantly from S$126.26 million to S$190.17 million.

This also probably explains why it can pay out a total distribution of 4.88 Singapore cents for FY2019 which spans from 1st April 2018 to 31st March 2019. Based on its latest share price of S$0.89, the distribution yield stands at 5.5%.

Sourced from Netlink Trust’s financial reports

Income investors should also pay attention to NetLink NBN Trust’s distribution policy, which is mandated to distribute 100% of its cash available for distribution (CAFD), which includes distributions received from its wholly-owned subsidiary, NetLink Trust. NetLink Trust’s distribution policy is to distribute at least 90% of its distributable income to NetLink NBN Trust.

Moving on to its debt profile, we can see that NLT has a very low leverage ratio (Total Debt/Total Assets) of around 0.15x in FY2019. With such a low leverage ratio, it caters for ample headroom for opportunistic acquisitions and developments.

Netlink Trust’s Ownership

As of 10Jul2019 | Sourced from ShareInvestor’s WebPro

Looking at the above ownership chart, we can see that the number 1 top shareholder is Singtel with a sizable 24.79% interest.

For those who are not aware, Singtel used to own a 100% stake in NLT and has to divest more than 75% of NLT under the mandate of the Infocomm Media Development Authority (IMDA) to regulate the telecom sector.

In addition, we can see that the other than Singtel, the other top 19 shareholders are mainly held by asset management firms and equity funds.

Netlink Trust’s Consensus Estimates

As of 10Jul2019 | Sourced from ShareInvestor’s WebPro

Taking a page from the ShareInvestor’s Analyst Consensus Estimates, NLT is well-covered by 11 ratings and rated a “BUY” consensus recommendation on average.

It has a mean target price of S$0.945 and translates to 7.33% potential upside. From the 2-year consensus est. history chart, the actual price has moved up around 18% from a year ago, closer to the target price which has stayed relatively constant.

Netlink Trust’s Growth Prospects

Other than the more quantitative figures we look at above, we zoom into the trust’s growth prospects via the latest FY2019 press release. Below are some important points we picked up from the “Outlook” segment (emphasis in our own words):

  • For FY20, revenue from key connection services is expected to be higher than that of FY19 mainly due to higher residential connections and installation-related revenues.
  • Capital expenditure in FY20 would also increase higher than that of FY19 as the group continues to expand and improve its network
  • Future demand to come from new housing estates and shift to cloud-based business processes by SMEs
  • Take advantage on various upcoming mega-projects like the Smart Nation initiatives, developments in Punggol Digital District and Jurong Innovation District, and 4th telecom operator in its mobile network deployment
  • NLT is monitoring the development of the 5G network in Singapore and will explore opportunities associated with the new market development

To end off, Netlink Trust (NLT) operates in a near monopoly industry due to its extensive fibre network and is foreseen to benefit from the many near-term initiatives as mentioned above. In addition, its latest FY2019 earnings report also demonstrated NLT’s ability to exceed its forecasted financial figures.

On the other hand, there are 2 main concerns on NLT investors should be aware of. Firstly, NLT’s pricing terms are regularly reviewed by the IMDA every 5 years to ensure its affordability due to its heavily regulated environment.

Secondly, given the constant changes regarding the forthcoming 5G technology, no one is able to ascertain the real impact to NLT and there is always the risk of technology obsolescence with new technologies.

Happy investing!

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