Broker’s Call: NetLink Trust’s H1 FY2023 Dividend Up 2.3%, Maintain Add

November 16, 2022

CGS-CIMB Analyst take

Stock markets have seen a resurgence in recent weeks. However, for Singapore investors, that still hasn’t dented the appeal of dividend stocks.

One of the less well-publicised dividend stocks on the Singapore Exchange (SGX) is NetLink NBN Trust (SGX: CJLU).

For investors not familiar with NetLink, it provides nationwide ultra-high-speed broadband access to end users via three channels; residential, non-residential, and non-building address point (NBAP).

This recurring revenue stream has allowed it to pay a reliable dividend ever since it was spun off by Singapore Telecommunications Limited (SGX: Z74), or Singtel, via a listing in July 2017.

NetLink reported its H1 FY2023 earnings (for the six months ending 30 September 2022) earlier this month.

The research team at CGS-CIMB Securities maintains our “ADD” recommendation on NetLink but we cut our target price to S$0.92 (from S$1.04 previously).

Here’s what Singapore dividend investors should know about NetLink Trust’s latest half-year FY2023 earnings.

NetLink H1 FY2023 results in line; DPU grows 2.3%

NetLink Trust’s saw its core net profit in H1 FY2023 come in at S$54.6 million, up 3.9% year-on-year, and in line with expectations.

The trust’s revenue grew by 6.2% year-on-year during the period to S$199.6 million, supported by higher ancillary project revenue and connections revenue.

This was partially offset, though, by lower central office revenue.

Core EBITDA revenue was up 4.7% year-on-year, in line with the higher top line, indicating good cost control discipline by NetLink.

Finally, NetLink’s distribution per unit (DPU), or dividend, was up 2.3% year-on-year to 2.62 Singapore cents for H1 FY2023.

Strong revenue growth helped by construction recovery

Ancillary project revenue surged 157% year-on-year to S$11.8 million, boosted by a recovery in construction activities.

NetLink’s project pipeline for H2 FY2023 looks healthy, mainly down to infrastructure projects driven by the Land Transport Authority (LTA).

The company also continued to see growth across all three fibre connection segments in Q2 FY2023, with residential, non-residential, and NBAP growing at 1.6%, 5.1%, and 35.9% year-on-year, respectively.

The interconnection offer (ICO) pricing review for the next review period (2023-2027) is still ongoing with the Infocomm Media Development Authority (IDMA).

NetLink expects the review to be completed in the first half of 2023 (slightly delayed) as more time is required from the IDMA side.

Management believe that any adjustment to rates will only be implemented with a few months’ lag, once a final decision is announced.

Fortress balance sheet, net gearing at 16.8%

As of the end of September, NetLink Trust’s net gearing was 18.6%, providing ample debt headroom for inorganic growth opportunities.

NetLink is continuing to look at opportunities in telecoms infrastructure businesses overseas that can deliver stable cash flows.

NetLink Trust’s effective average interest rate stood at 1.8% as of 30 September 2022, with 74% of its debts hedged into fixed rates (until March 2026).

Our estimates suggest 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%.

Reiterate our Add rating with lower target price

For NetLink Trust, we finetune our FY2023-2025 DPU estimates but tweak down our DDM-based target price to S$0.92 given a higher cost of equity assumption of 6.85% (versus 6.1% previously).

We continue to like NetLink as a defensive stock in this environment of uncertainty, given its strong earnings visibility as well as stability.

Potential upside re-rating catalysts include earnings accretive acquisitions and stronger-than-expected growth in NBAP connections as it benefits from telcos’ 5G rollout.

Meanwhile, downside risks include lower-than-expected ICO pricing in the upcoming review.

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