3Q24 normalised EBITDA meets street expectations
- NLT’s 3Q24 normalised EBITDA of S$73.4m (-0.7% q-o-q, -1.1% y-o-y) and normalised earnings of S$26.2m (+6.2 q-o-q, -3.8% y-o-y) met consensus expectations
- Residential connection pricing to be lowered marginally by 2% along the expected lines with regulatory rate of return unchanged at 7.0%
- Maintain BUY with TP of S$0.98, assuming a forward distribution yield of 5.5%. We expect NLT’s current yield spread of 331bps to narrow to 250bps due to the resilient nature of its distributions. NLT’s yield of 6.3% is also higher than the 5.4% average offered by Singapore industrial REITs despite much longer asset life of NLT.
3Q24 normalised EBITDA of S$73.4m (-0.7% q-o-q, -1.1% y-o-y) met consensus expectations. In 3Q24 (Mar YE) NetLink NBN Trust (NLT) reported normalised EBITDA of S$73.4m (-0.7% q-o-q, -1.1% y-o-y) excluding a one-off reversal of S$6m provision made earlier. This reversal followed a resolution of disputed power charges. NLT’s 3Q24 EBITDA margin was 70.5% vs 72.9% recorded in 2Q24. NLT’s revenue in 3Q24 was S$104.1m (+2.6% q-o-q, +3.9% y-o-y) on higher connection revenue across all segments and higher installation-related revenue. Residential connection continues to be the key contributor at 60% of revenue in 3Q24 (61% in 2Q24). In 3Q24, NLT’s residential fibre connection increased to 1.501m from 1.492m in 2Q24 while non-residential fibre connections increased to 53.2k from 52.6k. NLT’s 3Q24 normalised earnings was S$26.2m (+6.2% q-o-q, -3.8% y-o-y). NLT is incurring an additional capex of S$120m for its new central office and IT transformation, which will be incurred in FY24F and FY25F. overall, we project NLT to incur S$400m in cumulative capex over FY23-28F, slightly higher than S$378m incurred over FY18-FY23. Higher capex also implies higher regulated asset base and supports EBITDA growth. NLT’s net debt to EBITDA of ~2x implies big headroom to raise debt.
Residential connection pricing to be lowered marginally along the expected lines. From April 2024, residential connection pricing will be lowered by 2% to S$13.50 per connection while non-residential is unchanged at S$55 per connection, In the Non-building access points (NBAP) segment, which contributes less than 5% of the total revenue, connection price has been lowered by 4.5% to S$70.50 per connection. NLT’s regulatory rate of return is unchanged at 7% beginning from April 2024 for a 5-year period.
NLT ‘s yield spread of 331 basis points (bps) is still attractive compared to its last 3-year average of 324 bps. The Singapore Government’s 10-year bond yield of 3.0% implies a yield spread of 331bps, higher than the last 3-year average of 324bps. We expect NLT’s distribution per unit (DPU) to rise by 2% annually over the next few years, and the yield spread to narrow towards 250bps, to reflect the resilient nature of its distributions.
NLT’s share price has a negative correlation of 54% with the risk-free rate since the IPO.
Source: Monetary Authority of Singapore, Reuters, Company, DBS Bank
NLT is trading at a yield spread of 331bps near its +1SD of 401bps (3-year average at 324bps)
Source: Monetary Authority of Singapore, Reuters, Company, DBS Bank
NLT should trade a lower yield compared to Singapore industrial REITs. Industrial REITs tend to offer high yields due to their shorter asset life. NLT exhibits a much longer life as it incurs capex each year to maintain its regulated asset base. Hence, NLT should be trading at a lower yield than the industrial REITs in our view. NLT is currently trading at 6.3% compared to industrial REIT average of 5.4%.
NLT’s higher yield compared to Singapore industrial REITs is an opportunity as NLT’s asset life is much longer
Source: Companies, Reuters, DBS Bank