NetLink NBN Trust - DBS Research 2023-05-23: 6% Yield Largely Independent Of Macro Outlook

• NetLink Trust (SGX:CJLU) reported 4Q23 EBITDA of S$75.2m (+1.3% q-o-q, 7.3% y-o-y), 5.5% above consensus estimates, due to better-than-expected revenue.
• NetLink Trust’s 4Q23 revenue increased by 3.4% q-o-q (up 8.0% y-o-y) to S$103.7m, which was 4.4% above consensus estimates. The revenue increase was primarily due to higher ancillary project revenue and fibre connections revenue. The EBITDA margin in 4Q23 was 72.5% (3Q23 74.0%) while the consensus expected 71.8%.
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• During 4Q23, NetLink Trust’s residential connections increased to 1.485m from 1.481m in 3Q23. Non-residential fibre connections were flat q-o-q, reaching 52.1k, tracking behind our projection of 52.5k.

Key takeaway from call with NetLink's management

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• NetLink Trust expects ancillary revenue to continue to post strong revenue growth. This comes from diversion orders for underground ducts, especially from government bodies such as the Land Transport Authority (LTA) for Mass Rapid Transit (MRT)-based projects. Ancillary revenue contribution in FY23 rose to 6.4% of the total revenue from 2.7% in FY22.
• Typically, 100% of free cash flow is used to pay distributions, while growth capex funded by debt. In our estimate, maintenance capex hovers ~S$55m compared to its FY23 capex of ~S$97m implying S$32m of growth capex. NetLink Trust uses free cash flow to fund both distributions and maintenance capex while growth capex is funded by debt. However, in good years like FY23F, NetLink Trust also funded over 50% of its growth capex via its free cash flow. The idea is to ensure that distributions are less volatile than EBITDA and can rise gradually in the future.

NetLink Trust is trading at a 12-month forward distribution yield of 6.0%, implying a yield spread of 325bps.

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Sachin MITTAL DBS Group Research | https://www.dbs.com/insightsdirect/ 2023-05-23 SGinvestors.io

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