3QFY22: In Line; Network Rollout Lifts NBAP Connections
NetLink’s 3QFY22 core earnings grew 4% yoy to S$25.7m (-7% qoq). NBAP connections continued to grow (+52% yoy) thanks to network and 5G rollout while residential connections remained stable. This brought 9MFY22 core earnings to S$78.2m – in line. The next regulatory review comes into effect in 2023 as the company is currently in discussion with the government. We cut FY23 earnings by 4% on higher interest cost. Maintain HOLD with a lower target price of S$1.05.
RESULTS
• 3QFY22: Within expectations. NetLink NBN Trust (Netlink) reported a 3QFY22 core net profit of S$25.7m (+4% yoy, -7% qoq). The yoy increase was driven by lower finance cost (- 46% yoy) and good cost discipline. The sequential weakness was impacted by lower revenue from diversion revenue (-21% qoq) and lower tax credit (-87% qoq). This brings 9MFY22 results to S$78.2m (+13% yoy), accounting for 78% of our full-year forecast – in line, while topping consensus expectation (84% of full-year forecast).
• Top-line dragged slightly by lower diversion revenue… Total revenue for 3QFY22 was lowered by 1% yoy and qoq, mainly due to a 17% yoy and 21% qoq reduction in diversion revenue.
• …offset by growth in NBAP revenue. Positively, Netlink recorded a 52% yoy growth (+5% qoq) in non-building address points (NBAP) connection revenue on the back of higher demand for point-to-point connections with the rollout of 5G network, and Central Office diversity connections to support mobile network rollout. Additionally, residential connection revenue remained stable, growing 1% yoy as connections continue to rise to 1.458m (+1% yoy and qoq).
STOCK IMPACT
• Expect next regulatory review by 4Q22. With the last regulatory review (effective Jan-18), Netlink expects the next regulatory review to be carried out by the end of this year and take effect from 2023 onwards. Netlink is currently in discussion with the Infocomm Media Development Authority (IMDA) and alluded that the next return on regulated asset base (RAB) should be in line with the current 7% (pre-tax WACC). This will depend on the assumption of the forward yield curve and debt premium.
• Stable FY22 outlook. Key priorities include connecting more residential homes that are not on fibre (especially low-income households) via the IMDA Home Access programme. Netlink guided that the IMDA will bear the two-year subsidised fibre broadband connectivity and Netlink’s pricing would not be affected in this initiative. For non-residential and NBAP connections, Netlink will focus on adding more capacity to densify network and support 5G infrastructure. It also aims to deepen penetration on data centres’ point-to-point connections. More importantly, Netlink reiterated that its business remains resilient amid market volatility.
• Safe haven; attractive 5.2% dividend yield. Management remains cognisant of the company’s profile as a high-yielding, safe haven stock. As such, key criteria of any potential new investment in the near horizon would have to include: a) country risk premium, and b) a preferably stable cash flow via an asset sale and leaseback model. Importantly, Netlink will have sufficient headroom to drive its acquisition ambition without compromising on cash flow and dividends. Gross debt/EBITDA of 2.6x as of 31 Dec 21 provides ample room to increase debt for the group.
• We project an annual DPU of 5.1 S cents for FY22-24. This translates to a sustainable 5.2% net dividend yield.
EARNINGS REVISION/RISK
• We lowered FY23-34 earnings by 4%/2% respectively as we increased our interest cost assumption, in line with the rising rate environment.
VALUATION/RECOMMENDATION
• Maintain HOLD with a lowered DCF-based target price of S$1.05 (cost of equity: 6.3%, terminal growth: 1.8%) in tandem with earnings downgrade. We also rolled over our valuation window to FY23. At our target price, the stock trades at 15x FY23F EV/EBITDA, (1SD above its four-year mean EV/EBITDA of 13.8x).
• We continue to see the stock as a good shelter amid market volatility given its strong earnings visibility, healthy balance sheet and cautious approach in terms of overseas/domestic acquisitions.
SHARE PRICE CATALYST
• Key catalysts include: a) 5G beneficiary – more opportunities arising from mobile operators’ fibre network densification demand, b) growth in demand for NBAP connections with the rollout of 5G/Smart Nation initiatives, c) investors seeking defensive yield from Netlink’s resilient, predictable, transparent and regulated cash flow, and d) earnings accretive M&As.