Inline results, rising bond-yields to support regulatory WACC
- 9MFY22 EBITDA in line with our estimates keeping in mind the accounting adjustment in 1HFY22
- While we expect the regulatory WACC to remain stable, each 10 basis points change in the regulatory WACC can have 1% impact on EBITDA.
- Maintain HOLD with unrevised TP of S$1.02
9MFY22 EBITDA was inline with our estimates. NetLink’s (NLT) 9MFY22 revenue increased by 1.9% to S$282m, accounting for 73% of our FY22F estimates. Revenue increase of S$5.3m was primarily due to the higher residential, NBAP and segment connections revenue, installation-related revenue, partially offset by lower Central Office revenue. 9MFY22 EBITDA declined by 6.2% to S$197m due to the re-measurement loss of S$12.4m pertaining to finance lease receivables from lower renewed Central Office rental rate in 1HFY22, which is renewed every 10-years. The accounting standards require the reduction in rental rate for FY22 and subsequent years (i.e. remaining lease term of the leasehold ranging from 47 to 67 years) to be recognized upfront as the re-measurement loss described above.
Residential fibre connection addition has been slow due to delay in the completion of new buildings. By Dec 2021, NLT’s residential connections grew only 1.0% y-o-y to 1,458K connections. Our FY22F estimate for residential fibre connections stand at 1.471m. Netlink has been adding 2K new connections vs our expectations of 5K each quarter due to slower construction activities.
Improved performance in non-residential fibre connections. On the other hand, non-residential fibre connections grew 3.8% y-o-y to 49.8K , tracking slightly ahead of our expectations due to various promotions being offered especially 12-month free connections to SMEs.
We estimate every 10 basis points change in regulatory WACC to have 1% impact on its EBITDA. When NLT debuted the Singapore Stock Exchange (SGX) in July 2017, the 10-year Singapore bond yield was at 2.1%. Currently, the bond offers a yield of 1.96% and we estimate by 4Q23F, the SG 10-year bond could be much higher than 2.1%. This implies regulatory WACC could remain unchanged at 7.0% for Jan 2023- Dec 2027 or could even be slightly higher. In terms of sensitivity, each 10 basis points change in regulatory WACC could have 1% impact on EBITDA with any rise in regulatory WACC to be slightly positive or vice versa.
Balance sheet has ample strength for potential acquisition. NLT’s FY23F 2.6x gross debt to EBITDA implies ample headroom to fund future capex, distributions, and acquisitions. Such businesses operating on regulated asset base (RAB) model can easily lever up to 5-7x gross debt to EBITDA.