Inline FY22 results, Regulatory rate of return could rise?
- FY22 results and distributions were in line, we expect 1.2% higher DPU for FY23F (Scts 5.19 vs Scts 5.16 in FY22)
- Regulatory rate of return could rise in our view, each 10 basis points change in the regulatory WACC can have 1% impact on EBITDA.
- Maintain BUY with an unchanged TP of S$1.05.
NetLink’s FY22 revenue and EBITDA in line. FY22 revenue of S$378m (+2.5% y-o-y) was in line with our expectations. The yearly rise in revenue can be attributable to higher residential, non-building address points (NBAP) & segment connections, installation-related and ancillary project revenue, partially offset by lower central office revenue. FY22 earnings before interest tax amortization and depreciation (EBITDA) stood at S$267m (-1.2% y-oy) too met our expectations. The decline of 1.2% stemmed from a re-measurement loss relating to finance receivables coupled with lower net government grants. Resultantly, EBITDA margin during FY22 was at 70.7% compared to preceding year’s 73.3%. NLT reported FY22 net profit of S$87m (-5.0% y-o-y).
Slightly higher DPU declared y-o-y. Distribution per unit (DPU) of 2.57Scts declared for 2H22 (2H21: 2.55 Scts), an increase of 0.8% y-o-y. We project FY23F DPU of 5.19Scts, up 1.2% y-o-y. NLT’s FY23F 2.5x 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 5x net debt to EBITDA, implying room to raise another S$800m in debt.
Residential connection has remained largely flat in FY22. By the end of FY22, the addition in NLT’s residential connections have been largely flat, adding 6k connections, taking the total count to 1,464k, below our FY22 forecast of 1,471k. Our FY23F estimate for residential fibre connections stand at 1,501k largely stemming from improving take up from first time fibre users and newer connections. On the other hand, non-residential fibre connections grew 1.0% y-o-y to 50.3k, was slightly below our expectations.
We estimate every 10-basis point change in regulatory rate to have a +1% impact on its EBITDA. In terms of sensitivity, we estimate that each 10-basis point rise in regulatory rate would have a +1% impact on EBITDA and vice versa. When NLT debuted on the Singapore Stock Exchange (SGX) in July 2017, the 10-year Singapore bond’s yield was 2.1%. Currently, these risk-free bonds offer a yield of 2.75%. A higher risk-free rate implies rise in the regulatory rate of return for the next five years from Jan 2023 in our view. Regulatory review, however, could be delayed to end 2022 or early 2023 as the regulator has issued a consultation paper on non-pricing terms of some new services.
Maintain BUY with an unchanged TP of S$1.05. The yield spread over 10-year Singapore government bonds has narrowed to 260 basis points (bps) vs our expectations of 300 basis points. Any rise in regulatory rate of return could benefit the projected distributions. We see minimal downside risks to its distributions and its strong balance sheet should be able to support any unforeseen challenges in the business.