NetLink NBN Trust – Higher interest rates become a headwind February 16, 2022 267

PSR Recommendation: NEUTRAL Status: Downgraded
Last Close Price: SGD0.99 Target Price: SGD0.96
  • 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.

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About the author

Profile photo of Paul Chew

Paul Chew
Head of Research
Phillip Securities Research Pte Ltd

Paul has 20 years of experience as a fund manager and sell-side analyst. During his time as fund manager, he has managed multiple funds and mandates including capital guaranteed, dividend income, renewable energy, single country and regionally focused funds.

He graduated from Monash University and had completed both his Chartered Financial Analyst and Australian CPA programme.

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