+ 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.
– 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.
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.