Inline results; regulatory review is the key
- 1Q23 revenue and earnings met our expectations, with improved performance from Ancillary segment
- 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.
1Q23 revenue and earnings were in line with our projections. NetLink’s (NLT) 1Q23 revenue improved by 4.8% y-o-y to S$97.9m, representing 25% of our FY23F estimates. The S$4.5m rise in revenue was largely supported by higher ancillary project revenue, connections and co-location revenue. Ancillary revenue which accounts for 4.5% of NLT’s 1Q23 revenue had a strong impact as more diversion projects were completed compared to 1Q22. NLT’s EBITDA in 1Q23 stood at S$73.0m (+5.0% y-o-y) which was in line with our estimates, resulting in an EBITDA margin of 74.5% (74.4% in 1Q22). NLT’s earnings were reported at S$27.6m (+11% y-o-y) largely supported by higher EBITDA which was also in line with our projections.
~6,000 new connections were added under the residential segment. Residential connections contribution stood at 62% in 1Q23 (64% in 1Q22) and the number of residential connections was recorded at 1,469,815, increasing by 6,000 q-o-q.
Strong balance sheet is a big plus, could be useful in raising capex or any acquisition. NLT’s 2.0x net debt to EBITDA (trailing 12-months) 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. We expect 5.16 Scts Distribution per unit (DPU) in FY23F translating to a 5.5% dividend yield
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 2.69%. 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 ending 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 280 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.