Stronger connection growth
? Despite lower government grants, 3QFY22 NP grew by 4.1% yoy, helped by stronger performance in higher-margin fibre business.
? NLT saw faster fibre connection growth across all three fibre segments in 3Q.
? Rising rates environment should alleviate concerns over a cut in regulatory WACC in upcoming interconnection pricing review. Reiterate Add.
3QFY22: Solid set of numbers
NLT reported 3QFY3/22 net profit of S$25.7m (+4.1% yoy). Results were slightly above our expectations, but in line with consensus – 9MFY22 core net profit made up 79%/77% of our/Bloomberg consensus FY22F, respectively. 3Q revenue declined 1.2% yoy as lower diversion and central office revenue more than offset the faster growth in fibre connection revenues. Despite lower government grants, EBITDA remained flattish yoy in 3Q22 given the stronger performance in fibre business segment which has a higher margin profile.
Faster growth in fibre connections in 3Q
NLT saw faster growth across all fibre segment connections in 3QFY3/22. Its residential segment saw reacceleration in net additions of 7k (2Q22: 2k adds) to reach 1.46m connections (+0.5% qoq, +1.0% yoy). Non-residential connections also saw stronger additions, and now stand at 49.8k (+1.4% qoq, +3.7% yoy). The bright spot remains the non-building address point (NBAP) segment, which is the fastest growing with 3,962 total connections (+8.0% qoq, +68.4% yoy) as NLT supplemented local telcos’ rollout of 5G
infrastructure and smart nation linked initiatives.
Keep an eye on upcoming interconnection (ICO) pricing review
Key focus this year will be on the outcome of NLT’s negotiations with Infocomm Media Development Authority (IMDA) on the interconnection offer (ICO) pricing for the next review period (2023-2027). We expect the pricing review to be completed sometime in mid-2022F before being implemented in Jan 2023F. With a rising rates environment, we believe concerns over a cut in regulatory WACC should subside. We conservatively price in a 5% reduction in ICO pricing for the next review period in our forecasts, given a higher denominator (with increase in number of fibre connections), but believe that NLT’s strong operating cash flow generation can continue to support stable DPU growth of 1.5% p.a.
without meaningfully impacting its debt profile (refer to Figure 5 for sensitivity analysis).
Reiterate Add and TP of S$1.10
We raise our FY22F EPS by 3.2% on stronger margin assumptions, and fine-tune our FY23-24F forecasts. Reiterate Add and our DDM-based TP of S$1.10. Potential re-rating catalysts include earnings-accretive acquisitions and stronger-than-expected growth in NBAP connections, as NLT benefits from telcos’ 5G rollout. Downside risks include lower than-expected ICO pricing in the upcoming review.