Further disclosures needed
Ambiguity over regulatory decision
We have introduced an expanded ESG tear sheet for Netlink and assigned it an above average (50) overall score of 55 based on its aggregated quantitative / qualitative / target-based metrics. We acknowledged that NetLink Trust is a defensive play amid the current backdrop of rising inflation and a potential economic slowdown given its strong earnings visibility and stability. In our view, key overhang remains the ongoing regulatory fibre pricing review and losing attractiveness as a dividend yielding safe haven. Our FY23e forecast and HOLD recommendation remains unchanged.
More clarity would raise ESG score
As per our ESG assessment, Netlink has established internal ESG policies, but further disclosures relating to its quantitative “E” metrics would improve its overall ESG score. The company’s targets include reducing carbon emission by 50% by FY30 (against FY22 baseline) We think that a higher degree of transparency and a more comprehensive plan towards Scope 3 emission reduction would enhance its overall ratings.
Other governance to be addressed
Netlink’s Scope 1, 2 and 3 emissions trends are disclosed in FY22, which is positive. There are, however, other areas that need to be addressed including the chairman’s and management’s salaries as percentage of net profit, which has been on an increasing trend for the past 2 years.
On the back inflationary pressures and higher interest rates, Netlink’s financial costs is well hedged, with 76% of debt fixed at 1% until May 2026. However, modest growth in DPU reduces the attractiveness of NetLink as an income-yielding investment. NetLink’s dividend spread over bond yields and other interest-yielding assets has not widened since interest rates started to climb this year. On the regulatory review, we expect a mild decline in the fibre price for residential connections. This is, in our opinion, unlikely to impact dividend payout as higher borrowings or lower capital expenditure can tide it through any near-term shortfall.