• 1H24 results were within expectations. Revenue and EBITDA were 49%/50% of our FY24e forecast, respectively. DPU increased 1.1% YoY to 2.65 cents.
• 1H24 EBITDA grew 2.4% YoY to S$149mn, in line with the revenue growth of 2.9%. Residential connections during the quarter were 4,023, below our trendline growth of 5,500 per quarter.
• We maintain our FY24e forecast and DCF target price of S$0.87. Our NEUTRAL rating is unchanged. The regulatory review of fibre rates is likely to be announced by this year. We believe the current distribution is sustainable. The repricing of the S$510mn interest rate hedges in 2026 will place some downward pressure on distributions.

The Positive

+ Higher distribution. Interim distribution rose 1.1% YoY 2.65 cents. This is modestly higher than our expectations of unchanged distribution for the year. NetLink is paying out S$103mn in distributions from free-cash flow of around S$80mn.  The balance is topped up from cash held in reserves.

The Negatives

­- Another weak quarter of residential connections.  Residential connections increased by only 2,369 in 2Q24, the weakest in eight quarters. We believe delays or renovation periods before moving into the new homes drove the sluggishness.

- Finance cost rose 30% YoY.  The unhedged portion of S$735mn gross debt continued to be a drag on cash-flows. Net finance cost rose 30% to S$9.2mn. Assuming the current interest rate hedged loan of S$510mn is repriced upwards by 300 bps, the distribution could be negatively impacted by around 7.5%.

• Results were within expectations. 1Q24 revenue and EBITDA were 25%/25% of our FY24e forecasts. Core residential fibre revenue was up 1.4% YoY to S$61.5mn.
• 1Q24 EBITDA was up 3% YoY to S$75mn excluding the 38% surge in interest expense to S$4.3mn. Residential connections during the quarter was 4,023, below our trendline growth of 5,500 per quarter.
• No change to our FY24e forecast and DCF target price of S$0.87. Our NEUTRAL rating is unchanged. The new fibre rates NetLink can charge its customers is expected to be announced soon. Our base case is that fibre rates will see a modest decline. The distribution yield is sustainable from stable operating cash-flows from 1.48mn subscribers and access to financing.

The Positive

+ Opportunity in higher broadband bandwidth. As 10GBps broadband speeds become more available over the next few years, there will be more demand from telcos at Netlink central offices. Demand is for larger space, more cooling and increased power supply in the central office. The timeline to roll out more 10GBps will ultimately depend on customer end demand and use cases.

The Negatives

­- Slower than expected residential connections.  Residential connections increased by 4,023 in 1Q24, the slowest in four quarters. The weakness is caused by delays or time taken to renovate and move into the vacant units.

- Continued rise in interest expenses.  Although the borrowings at a fixed rate is stable at 69.4%, the effective average interest rate in 1Q24 rose by 0.8% points YoY to 2.6%, driving interest expense up.

• FY23 revenue and EBITDA were within expectations, at 101%/103% of our FY23e forecasts. A diversion revenue spike of 130% YoY in 4Q23 surpassed our expectations.
• Core residential revenue was stable at S$61.4mn, up 1.4% YoY. Interest expense almost doubled to S$5.4mn due to higher interest rates and capital expenditure.
• The new fibre rates NetLink can charge its customer is expected to be announced soon. Our base case is that fibre rates will be nudged marginally lower. Any impact on dividends is muted due to the ability to raise borrowings. Our FY24e EBITDA is raised by 2% and DCF target price nudged up to S$0.87 (prev. S$0.85). Our NEUTRAL recommendation is maintained. The distribution yield is sustainable from stable operating cash-flows and access to financing.

The Positive

+ Of the S$7.5mn improvement in revenue, $4.7mn is from diversion. Diversion revenue comes from removing old fibre ducts to new locations due to the construction of new highways, MRT network and property development projects. Increased construction activity will speed up the completion of new homes and will aid in residential fibre connections. 

The Negative

­- Extra capex and interest expenses jump.  CAPEX rose 31% YoY to S$96.7mn. The extra spending is for a new Seletar Central Office (CO). CAPEX is expected to remain elevated this year. Capital commitments have almost tripled to S$138mn (FY22: S$52mn). The extra CAPEX required an increase in borrowing by around S$70mn, leading to higher interest expenses. As the country heads towards 10GBps broadband, more equipment will be required in the COs. To cater for the extra equipment, NetLink will need to expand power, cooling and space in the COs. The push toward Wifi 6e and 7, will be additional catalysts to drive up broadband demand.

• 9M23 revenue was within expectations but EBITDA exceeded, at 76%/80% of our FY23e forecasts. 3Q23 revenue was up 7% driven by a spike in diversion revenue to S$5.6mn.
• Completion of the regulatory review of fibre prices is expected to be completed by the March quarter. Points of discussion include WACC, allocation of cost by segments and how much of the recent spike in interest rates and inflation should be considered.
• Our base case is that fibre rates will be nudged marginally lower. Any impact on dividends is muted due to the ability to raise borrowings. Our FY23e EBITDA is raised by 5%, from higher diversion revenue and more stable staff and other operating expenses. Our NEUTRAL recommendation and DCF target price of S$0.85 is maintained. We find the dividend yield of 6% less attractive, especially with limited growth in dividends and headwinds from rising interest expense.

The Positive

+ Pick up in diversion. Bulk of the growth came from the almost tripling of diversion revenue to S$5.6mn.  The rise is due to heavy infrastructure projects -  from MRT to highways -  to which demand for diversion has jumped. Pre-pandemic, diversion revenue was trending at similar levels of S$5.4mn per quarter. Other segments that enjoyed revenue growth were NBAP (+38^ YoY) and central office (+13.5% YoY).

The Negative

­- Interest rates start to bite.  Net finance charge jumped almost 59% to S$3.6mn in 3Q23. Of the S$690mn of gross debt, 73.9% or S$510mn is fully hedged til 2026. The balance is an unhedged S$180mn floating rate loan at SORA plus a margin. Effective average interest rates have risen from 1.1% to 2.0%.

Outlook

The pressure points from higher interest rates remain. High-interest rates (and increased CAPEX for a new central office) will cap the growth in operating cash flows and the attractiveness of the current 6% dividend yield.

• 1H23 revenue and EBITDA were within expectations, at 52/53% of our FY23e forecasts. 1H23 DPU was 2.62 cents, an improvement of 2.3% YoY.
• Residential fibre connections increased by 10,026 in 1H23 (1H22: +3,946). The jump follows the resumption of new home construction as restrictions were lifted. New connections are normalising to 20,000-25,000 p.a. in household formations.
• We nudged up our FY23e EBITDA by 2% to account for the higher diversion revenue.   Regulatory review of fibre prices is still ongoing with possible completion by the middle of next year. Our base case is the regulatory review will have minimal impact on cash available for distribution as dividends. Our NEUTRAL recommendation is maintained. The DCF target price is lowered to S$0.85 (prev. S$0.96) as we raised our risk-free rate assumption.

Results at a glance

Source: Company, PSR

The Positive

+ Rebound in diversion revenue. Diversion revenue picked up as construction activity returned especially for MRT and other infrastructure activity. Margin on diversion revenue is around 35% against the group EBITDA margin of 73%.

The Negative

­- Higher interest expenses and rates.  1H23 finance cost jumped 42% to S$7.6mn. The effective interest rate has risen to 1.9% (1H22: 1.1%). Around 74% of the loans have been hedged at a fixed interest rate, namely the 5-year term loan of S$510mn was hedged at 1% till May 2026.

Outlook

Cash-flows will remain stable with residential connection revenue rising around 1 to 2% p.a. Regulatory review may lower fibre rates due to the expanded base of connections after the previous review. Nevertheless continued CAPEX and a high WACC could keep any price changes minimal.

Our NEUTRAL recommendation is maintained with an lower TP of S$0.85 (prev. S$0.96)

Limited growth in DPU will be a challenge in a rising interest rate environment. Investors will look towards a higher dividend yield as risk-free rates rise. NetLink dividend yield spread over 10-year risk free has averaged 3.5% historically. It is now narrowed to 2.4%.

• 1Q23 revenue and EBITDA were within expectations, at 25/27% of our FY23e forecasts. Revenue rose 4.8%, supported by a sharp rebound in diversion revenue. Central office remains a drag as customers surrender more equipment space.
• Residential fibre connections rose 5,598 in 1Q23 (1Q22: +2,292). Last year was impacted by lockdowns and movement restrictions.
• Interest rate risk is well hedged, with 76% of the debt fixed at 1% until May 2026. Regulatory review of fibre prices is ongoing. Recent inflationary pressures and higher interest rates are positives. The planned capital expenditure (or regulated asset base) and WACC under consideration will be higher. No change to FY23e forecast. Our NEUTRAL recommendation and DCF target price of S$0.96 is maintained.

The Positive

+ Rebound in construction and installation activity. Residential connections are normalising post-pandemic. In the past two quarters, net connections were 11,842, triple the 3,946 a year ago. The rebound in construction and installation post-pandemic increased diversion revenue by S$1.8mn or 136% YoY.  Customers in diversion include HDB and LTA.

The Negative

­- Central office revenue sliding.  Major customer Singtel is renting less space as less telecommunication equipment is housed in Netlink’s seven central offices. Netlink will look to alternate users for their central office space.

Outlook

On the regulatory review, we expect a mild decline in the fibre price for residential connections. It is unlikely to impact dividend payout. Higher borrowings or lower capital expenditure can tide through any near-term shortfall, in our opinion.

Our NEUTRAL recommendation is maintained with an unchanged TP of S$0.96

The 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.

• FY21 revenue and EBITDA were within expectations, at 101/103% of our FY22e forecasts. 4Q22 revenue was flat and EBITDA up 3% YoY excluding write-offs. 2H22 DPU improved a modest 0.8% YoY to 2.57 cents.
• Residential fibre connections increased by 6,244 during the quarter. The annualised run-rate of residential connections is around our modelled 25,000 connections per annum.
• A regulatory review of fibre prices is underway. New fibre prices are to be implemented on 1 January 2023. Compared with five years ago, the regulated asset base is higher. However, the number of residential connections is one-third higher. Our forecast assumes no change in tariffs. We have kept our FY23e forecast intact.  Our NEUTRAL recommendation and DCF target price of S$0.96 is maintained.

The Positive

+ Recovery in residential connections. During the pandemic, residential connections were around 15k in 2021. We have seen a significant recovery in connections, back to an annualised run-rate of 25k-26k. The lifting of COVID-19 restrictions is improving the construction of new residential homes.

The Negatives

­- Ducts and manholes see multi-quarter decline.  The weakest revenue segment has been the 3% reduction in duct and manhole revenues. Major customer Singtel will see less use of the ducts for their copper lines.  

Outlook

The upcoming regulatory review will determine the residential tariffs for the next five years. Factors considered will be WACC, size of the regulated asset base, future capital expenditure and the number of connections. Our model assumes no change in tariff. Nevertheless, lower tariffs may impact cash available for distribution. However, there are other levers to maintain near-term dividends such as higher borrowings or lower capital expenditure.

We maintain our NEUTRAL recommendation with an unchanged TP of S$0.96

We expect distribution per unit to be stable. The continuous rise in interest can taper the attractiveness of the distribution as earnings growth will be limited.  

• 9M22 revenue and EBITDA were within expectations, at 75%/75% of our FY22e forecasts. 3Q22 revenue was down a modest 1.3% and EBITDA stable YoY.
• Residential connections rose 7,423 during the quarter, the highest in five quarters. Construction sector capacity has recovered but is still below pre-pandemic levels.
• We are maintaining our FY22e forecast. The DCF target price is lowered from S$1.03 to S$0.96 as we raised our WACC from higher a risk-free rate assumption. Our ACCUMULATE recommendation is downgraded to NEUTRAL. Higher interest rates will raise financing cost, lower valuations and reduce the appeal of bond-like equities. There is a risk that the upcoming regulatory review may lower prices and revenue. However, dividends can be maintained through lower CAPEX or additional financing.

The Positives

+ Pick up in connections. 3Q22 experienced a pick-up in residential and business connections. Residential connections during the quarter were up 7,243, the highest in five quarters and a 28% YoY jump. Non-residential, or business connections, similarly enjoyed an improvement in numbers. The additional 700 connections this quarter were the highest since 2Q19.

+ Plunge in net finance charges. 3Q22 finance charges dropped 46% to S$2.3mn. The effective interest rate has declined from 2.4% to 1.1%. NETLINK has hedged the interest rate on half its S$666mn gross debt. The remaining unhedged portion bears a SORA interest rate of 20-25 bps. The next upcoming debt due for renewal is a S$156mn revolving credit facility, due in March 2023.

The Negatives

- Diversion revenue declined. Diversion revenue was down 48% YoY to S$2.0mn in 3Q22. The capacity and availability of contractors are still impacted by the shortage of workers. Margins are low for diversion revenue.

Outlook

The regulatory review of fibre prices will be announced this year and will be effective 1 January 2023. We worry that prices may be under pressure due to lower interest rates compared with 2017 and the higher number of subscribers. However, the increase in the regulated asset base can minimize any downside to tariffs. Another lever to maintain dividends will be to raise borrowings or reduce capital expenditure.

We downgrade our ACCUMULATE recommendation to NEUTRAL with a lower TP of S$0.96

Rising interest rates are becoming a headwind for the share price through higher financing costs, lower valuations and a re-rating.

• 1H22 revenue and EBITDA were within expectations, at 50%/48% of our FY22e forecasts. DPU was raised a modest 1.2% YoY to 2.56 cents.
• 1H22 residential fibre connections rose only 3.9k. The run rate is below our 25k net connections expected in FY22e. Delays in the construction of new homes is the bottleneck.
• FY22e revenue estimate is nudged up for higher installation and diversion revenue. EBITDA is reduced by 5% to account for the one-off non-cash finance lease receivable remeasurement of S$12.4mn. Our DCF TP of S$1.03 (WACC 5.9%) and ACCUMULATE recommendation is unchanged. The dividend yield of 5.1% is expected to be stable, backed by monthly recurring revenue from more than 2mn fibre connections in homes and businesses.

The Positives

+ Normalised EBITDA expanded 3% YoY. Excluding the lease receivable remeasurement loss of S$12mn and grants and rebates last year of S$5.4mn, EBITDA is 1H22 would have risen 3.1% YoY to S$138mn (1H21: S$134.3mn). EBITDA  growth came from the 38% revenue growth in diversion and co-location revenue to S$14mn. A rebound from last years circuit breaker disruption.

+ Lower interest expense. Finance cost was down 45% YoY to S$5.3mn. Borrowing cost has been lowered from 2.4% to 1.1% following the refinancing in June. Some of the hedges in the prior period has started to run off.

The Negatives

­- Residential connections are still soft. New residential connections in 1H22 were only 3,946. A steep drop from 9,915 in 1H21. Our forecast for FY22e is lowered from 25,000 to 10,000 new connections.

Outlook

FY22e is a recovery from the circuit breaker disruption. Installation revenue from NBAP and diversion work rebounded from a low base last year. There is still a lingering impact from the pandemic due to delay in home construction, impacting residential connections. The increase in capital expenditure will depress dividends in the near term, but will build up the regulated asset base and yield returns in the next regulatory review

Our ACCUMULATE recommendation maintained on unchanged TP of S$1.03

NetLink’s dividend is stable with support from monthly recurring connection revenue and capital expenditure flexibility.

• 1Q22 revenue and EBITDA within expectations, at 25%/19% of our FY22e forecasts.
• Residential fibre connections increased by 2.3k this quarter, below our annual estimate of 25k. We expect a rebound in the latter part of FY22 with renewed home construction.
• No change in our estimates. ACCUMULATE rating and DCF TP of S$1.03 (WACC 5.9%) unchanged. Yields of 5.2% supported by monthly recurring revenue from more than 2mn fibre connections in homes and businesses. Regulatory review of fibre rates expected in mid-2022, likely implemented at end-2022.

The Positive

+ Non-residential connections highest in six quarters. Non-residential connections rose around 490  to 48.6k, the biggest increase in six quarters. The improvement came from higher take-up by small-medium enterprises. Non-residential is stable, around 8% of revenue.

The Negatives

­- Run-rate of residential connections below our model. We are expecting 25k new residential connections in FY22e. 1Q22 new connections were only 2.3k. We expect improvements in 2HFY22 as HDB construction gathers pace. The 25k net additions represented a 1.7% increase to 1.44mn.

- Ducts and manholes remained weak. Revenue from ducts and manholes declined 5% YoY to S$7mn. The weakness could persist as major customer SingTel (ST SP,ACCUMULATE, TP S$2.52) will have less use of these ducts for copper-wire installations.

Outlook

FY22e should be a stable year for earnings and cash flows, supported by a large installed base of fibre connections. A 5-year regulatory review of prices will take place next year. There is limited visibility at present but fibre price charges may be moderately lower due to a decline in WACC and a higher base of connections. Offsetting this would be NetLink’s larger regulatory base and lower capex. Both should keep FCF at around S$200mn to sustain dividends.

Maintain ACCUMULATE and TP of S$1.03

NetLink’s key attribute is stable dividend yields backed by monthly recurring revenue from more than 2mn fibre connections in homes and businesses.