NetLink NBN Trust: Company Profile
NetLink NBN Trust (SGX: CJLU) is part of the NetLink Group, whose nationwide network is the foundation of Singapore’s Next Generation Nationwide Broadband Network (“NBN”), and was spun out of Singtel (SGX: Z74) back in July 2017 in order to fulfil Singtel’s requirement to the Info-communication Media Development Authority (IMDA). After the divestment, Singtel now owns 24.99% of NetLink NBN Trust.
NetLink Group designs, builds, owns and operates the passive fibre network infrastructure for Singapore’s next-generation NBN. The fibre network consists of ducts, manholes and fibre cables that provide network coverage to residential homes and non-residential premises in Singapore.
Netlink Trust’s Competitive Edge
Currently, fibre is the number one choice for delivering broadband services, and around 9 out of 10 homes (i.e. 90%) in Singapore has a fibre termination point installed. For residential fibre connections, Fibre is able to support wireless access and works hand-in-hand with WiFi hotspots and 4G/5G technologies. Capacity is also scalable and can support future transmission technology, enabling business relevance for many years to come.
NetLink NBN Trust is the only entity providing residential fibre connections. This provides the group with a strong competitive edge as it is operating with a monopolistic mandate. Though the group faces competition in the non-residential fibre connections space, it does have a significant market share in Singapore.
Note that the Trust’s pricing of its services is regulated by IMDA, and a pricing review will be held every five years. The most recent review was completed in May 2017; therefore, prices will hold steady from Jan 2018 through to December 2022. The next pricing review will take place in 2023, and the terms are regulated using a regulatory asset base (RAB) model. This allows NetLink NBN Trust to recover components such as the return of capital deployed (i.e. depreciation), the return of capital employed (in growing connections) and operating expenditure.
Growth of the Business
Source: NetLink NBN Trust’s Earnings Releases, Author’s Compilation
As NetLink NBN Trust has only been listed for around 2 years plus, the financial information provided only consists of one full financial year, as shown above. Note that for FY 2017/2018*, this was from the period 19 June 2017 (date of listing) till 31 March 2018 (fiscal year-end). FY 2019/2020** numbers are annualised based on the reported 1H FY 2019/2020 numbers.
From the graph, it can be seen that revenue is trending upwards as a result of a slow but sustained increase in the number of connections. EBITDA (earnings before interest, taxes, depreciation and amortisation) has also been steadily rising, as the bulk of the Trust’s expenses involve non-cash items such as depreciation (on the fibre asset network it owns).
Distribution per unit (DPU) hit 4.88 cents in FY 2018/2019 and is projected to slightly exceed 5 cents for FY 2019/2022. At the last traded share price of around S$0.95, the Trust provides a prospective dividend yield of around 5.3%. Note that the stability of the Trust’s income is what makes NetLink NBN Trust an attractive and low-risk investment.
Connections Trend
Source: NetLink NBN Trust Quarterly Presentation Slides, Author’s Compilation
From the quarterly connection numbers above, it can be seen that NetLink NBN Trust is slowly but steadily increasing its number of connections for all categories. Residential connections form the bulk (around ~61.2% of 1H FY 2019/2020 revenue) of revenue, while non-residential connections form around 8.3% of total revenue for the same period.
Non-building address points (NBAP) represent connections that are not tied to buildings and includes structures such as lamp posts located along the streets. NBAP can be viewed as a proxy for Singapore’s Smart Nation ambitions as well as the upcoming implementation of 5G networks. There was a slight dip in 1Q FY 2020 for NBAP due to the review of the Smart Nation Sensor Platform Program, but growth has since resumed for 2Q FY 2020.
Risks
Though the Trust operates a predictable and stable business with a high certainty of revenue flow, there are still several risks to take note of. One of them is the volatility in installation and diversion revenue that is dependent on the number of new connections. However, a mitigating factor is that this only makes up less than 10% of total revenue.
Another risk is that IMDA may lower the regulated price for the Trust during its next review period, as this is based on the weighted average cost of capital (WACC) of 7% currently. If interest rates continue to fall over time, it could exert pressure on IMDA to lower the WACC, thereby impacting the Trust’s pricing and adversely impacting revenue. However, this risk is still three years into the future, but investors need to be alert and observe the direction of interest rate movements.
Growth Initiatives and Prospects
NetLink NBN Trust will continue to invest in and expand its network to improve the overall network’s capability and resilience. Revenue is expected to be higher for FY 2019/2020 due to the higher number of overall connections. However, capital expenditure is also expected to be higher than last year.
Singapore is working towards the eventual commercialisation of 5G broadband technology, and NetLink Group is supporting IMDA’s objectives in order for the successful deployment of 5G infrastructure and to grow the 5G ecosystem. The group will be supporting M1 for its 5G trial at a new restaurant in Marina Square, and TPG Telecom for its 5G network trials across Singapore Science Parks I and II.
With more residential homes being built over the next few years, NetLink NBN Trust can tap on these for new connections, thus steadily increasing its residential connections over time. For non-residential connections, the group will work with government agencies with a focus on targeting SMEs. The NBAP segment is also expected to grow and contribute more significantly to overall revenue in future years as 5G infrastructure takes root in Singapore.