1HFY24: Stable Results, Upcoming IMDA Review Expected By End-3QFY24
Despite higher yoy revenue and EBITDA, 1HFY24 PATMI (-3.1% yoy) was just below our expectations, dragged by higher finance costs, and accounted for 44% of our full-year forecasts. The next regulatory review is expected to be completed by end-3QFY24 and implemented by 1QFY25. Given its stable revenue streams and operating cashflows, we continue to like Netlink as it is a high-yielding, safe haven stock. Maintain BUY with a lower target price of S$1.01.
• 1HFY24: Stable results. In line with expectations, Netlink NBN Trust (Netlink) reported higher revenue (+2.9% yoy) and EBITDA (+2.4% yoy), each accounting for 49% of our full year forecasts and driven by higher connections revenue across all segments. However, dragged by higher finance costs (+43.8% yoy), 1HFY24 PATMI was slightly lower at -3.1 yoy and accounted for 44% of our full-year forecasts, just below our expectations. For 2QFY24, revenue was slightly lower (-0.3% yoy, -2.5% qoq), largely due to lower ancillary project and co-location revenue. Similar to 1HFY24, 2QFY24 PATMI also softened (-8.4% yoy, -12.7% qoq) from higher finance costs.
• Higher dividend. Netlink declared a slightly higher 1HFY24 interim dividend of 2.65 S cents/unit (1HFY23: 2.62 S Cents / unit), accounting for 49.5% of our full-year forecasts and in line with expectations. This implies an annualised FY24 dividend yield of 6.3%.
• Increased interest costs. Netlink’s 1HFY24 net finance costs surged 30.2% yoy as effective average interest rates increased to 2.64% (1HFY23: 1.92%, 1QFY24: 2.60%). Similar to 1QFY24, 69.4% of Netlink’s S$735m borrowings remain hedged at fixed rates.
• Mixed segmental performance. Despite higher connections for all segments, 2QFY24 segmental performance was mixed. Installation and Non-Building Address Point (NBAP) connections were the clear outperformers, with segmental revenue growing 48.2% yoy and 19.3% yoy respectively. Revenue from residential connections also increased 1.4% yoy, given the higher number of connections. However, revenue from ancillary projects and colocation both fell 41.1% yoy and 19.9% yoy respectively. For 2QFY24, connections for residential (+0.2% qoq, +1.2% yoy), non-residential (+0.2% qoq, +1.9% yoy), NBAP (+2.4% qoq, +10.4% yoy) and segment connections (+7.2% qoq, +32.4% yoy) grew.
• No announcement of IMDA review. Results for the upcoming IMDA regulatory review were not announced in the latest 1HFY24 business update. However, the group gave a timeline and expects the review to be completed by this calendar year (end-23). Netlink has also been investing in its network assets to cater to the growing end-user demand across residential, non-residential, NBAP and segment connections. These investments, in turn, would increase its Regulated Asset Base. At this juncture, we expect the next return on the regulatory asset base to be slightly higher, in view of the unprecedented elevated interest rates environment and expected higher cost base from inflationary pressures.
• Safe haven; attractive 6.3% dividend yield. Armed with predictable revenue streams, 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 has sufficient debt headroom (21.5% net gearing) to drive its acquisition ambition without compromising on cash flow and dividends. There is however, no fixed timeline in terms of M&A activities and management may even consider a JV or consortium outfit in its acquisition strategy. Netlink sees growth opportunities arising from the digital economy, 5G rollout, connectivity into data centres and Singapore’s Smart Nation initiatives.
• We cut our FY24-26 earnings estimates, on the back of higher interest costs. We now forecast FY24-26 PATMI at S$107.6m (S$119.5m previously), S$118.8m (S$131.3m previously) and S$128.8m (S$142.8m previously) respectively.
• Potential downside may come from higher operating costs from inflationary pressures.
• Maintain BUY with a lower DCF-based target price of S$1.01 (S$1.05 previously). (WACC: 6%, terminal growth: 1%). At our target price, the stock trades at around 16x FY24 EV/EBITDA.
• 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.
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• 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.