Company background

Netlink NBN Trust (NLT) is the only fibre network with nationwide residential coverage in Singapore. NLT designs, builds, owns and operates the passive fibre network infrastructure which includes ducts, manholes, fibre cables and central offices. As of 31 December 18, NLT supports close to 1.3mn residential end-user connections and more than 45,000 non-residential end-user connections and 1,462 Non-Building Address Point (NBAP) across Singapore. NLT owns more than 16,000 km of ducts, 62,000 manholes, 76,000 km of fibre cables and 33,000sqm of co-location space.

Investment thesis

1. Sole network provider of residential fibre broadband in Singapore. NLT nationwide residential coverage in Singapore accounts for about 60% of its revenue. The asset base of more than S$3bn and the duration needed to build a comparable network across Singapore, will pose a major barrier to entry. Any meaningful return on investment would be a challenge without the similar financial assistance of the Singapore government. Under iN2015, NLT received an aggregate grant worth of S$732mn. 

2. Stable and predictable revenue stream. We believe NLT enjoys a resilient business model because the majority of its revenue is derived from recurring subscription fees (~67%) from residential and non-residential fibre connections. In the long run, the residential segment is pegged to new homes build or population growth. Growth could also stem from dual fibre connections per household. Cancellation of connections is rare. In the medium term, growth in residential connections is being propelled by migration of legacy Asymmetric Digital Subscriber Line (ADSL) and Hybrid Fibre Coaxial (HFC) connections to fibre. We project the residential segment to grow 11.5% to 1.4mn connections and the non-residential segment to grow 5.3% YoY to 48,800 connections in FY20e. 

3. Future growth from NBAP and non-residential connections. Although revenue contribution from NBAP is still modest (~2% of revenue) we expect government smart nation initiatives to propel growth. We project a 41% YoY growth rate in FY20e. Non-residential connections provide an additional avenue for growth. Demand is expected to come from SMEs as they upgrade to fibre for cloud-based applications. However, there is competition from retail service providers (RSPs) with their own fibre infrastructure and competes directly with NLT. Hence, we are more conservative with our projections and give a 5.3% YoY growth rate for FY20e.

 We initiate coverage on NLT with a target price of S$0.89

We initiate coverage on NLT with a target price of S$0.89. We used a DCF approach in our valuation because of the regular stream of cash generated from NLT’s fibre business. Our valuation is based on a WACC of 6% and a terminal growth rate of 1%.