Broker’s Call: NetLink NBN Trust Q1 FY2023 Net Profit Up 11%, Maintain Add

August 25, 2022

CGS-CIMB Analyst take

Dividends have been the name of the game for Singapore investors so far in 2022. That, along with reliability in a business model, have been sought-after features for income investors.

One such company that provides a necessary service is NetLink NBN Trust (SGX: CJLU). It designs, builds, and operates the passive fibre network infrastructure of Singapore’s Next Generation Nationwide Broadband Network (NBN).

NetLink provides nationwide ultra-high-speed broadband access to end users via three channels; residential, non-residential, and non-building address point (NBAP). This reliable revenue stream allows it to pay a dividend that yields in excess of 5%.

The company reported its Q1 Fiscal Year 2023 (FY2023) earnings in the middle of August. The research team at CGS-CIMB Securities maintains our “ADD” call on NetLink and our S$1.04 target price for the trust.

Here’s all that dividend investors need to know about NetLink’s latest numbers.

Net profit in line, revenue rises 5%

NetLink Trust’s Q1 FY2023 net profit came in at S$27.6 million, up 11.3% year-on-year. That was in line with consensus expectations.

Meanwhile, its revenue growth was 5% year-on-year to S$97.9 million. That was driven mainly by higher ancillary project revenue and connections revenue but was partially offset by lower central office revenue.

The core reason for topline expansion for the period was ancillary project revenue – which exploded 136% year-on-year – to S$4.4 million.

On other fronts, its residential segment saw net additions of 6,000 connections to reach a total of 1.47 million connections. This was up 1.4% year-on-year and 0.4% quarter-on-quarter.

It also happened to be substantially bigger than the number of net addition connections NetLink had in Q1 FY2022 (of 2,000).

Supporting NBAP and segment connections was the fastest growing portion of the business with 4,649 total connections – up 36.7% year-on-year and 8.0% quarter-on-quarter.

This growth comes as NetLink provides support for local telcos’ rollout of 5G infrastructure and projects that required a higher level of network resiliency.

Robust balance sheet can fund potential acquisitions

NetLink Trust’s net gearing stood at 20.8% as of 30 June 2022. Naturally, that low level provides ample debt headroom for inorganic growth opportunities.

In fact, NetLink continues to explore opportunities in telecoms infrastructure businesses overseas that can deliver stable cash flows.

As of the end of June 2022, NetLink Trust’s effective average interest rate stood at 1.8%, while it has a S$156 million loan facility that is due to be refinanced in FY2023.

We believe that for every 50 basis point (bp) increase in weighted average interest rate costs, NetLink’s earnings per share (EPS) could be negatively impacted by just under 3%.

How’s NetLink Trust doing on ESG?

NetLink Trust ESG score

Source: CGS-CIMB Research

On the Environmental, Social and Governance (ESG) front, NetLink Trust scores a “C” for its performance although it has made progress on several fronts.

One is the area of staff turnover, which was high in FY2019 (at 13.5%) and FY2020 (at 17.7%). However, this improved to 6.6% in FY2021.

NetLink Trust has also set a target of reducing its scope 1 and 2 emissions by 50% by FY2030 (with FY2022 as a baseline) and achieving net zero by 2050.

Reiterate our Add rating

For NetLink Trust, we keep our earnings estimates unchanged but we slightly lower our target price to S$1.04 (as we factor in higher risk-free rates given the higher interest rate environment).

We still believe that NetLink is a defensive stock amid the current uncertain backdrop of rising inflation and a potential recession.

Upside potential could come from earnings-accretive acquisitions but investors should remain conscious of downside risks, primarily lower-than-expected ICO pricing in the upcoming review.

Want to know more? Join ProsperUs for an in-depth discussion with NetLink NBN Trust’s management tonight at 7:30pm! Sign up here.

Disclaimer: CGS-CIMB Securities SMID Analyst Khang Chuen Ong doesn’t own shares of any companies mentioned.