NetLink NBN Trust
The latest investment analysis on NetLink NBN Trust
Group Research - Equities14 Mar 2025
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Company Overview
NetLink NBN Trust (the Trust) is a Singapore-based business trust. It designs, builds, owns and operates the passive fiber network infrastructure comprising ducts, manholes, fiber cables and central offices of Singapore's Next Generation National Broadband Network (Next Gen NBN). Its network provides nationwide coverage to residential homes and non-residential premises in mainland Singapore and its connected islands. For residential homes its network is used for the purpose of end-user fiber connections, such as broadband, Internet-protocol television (TV) and voice over Internet protocol services. It provides d point to-point fire connections, which comprise central office-to-central office fiber connections and central office-to-main distribution frame room fiber connections, among others. It offers fiber services to non-residential end-users, such as shopping malls, transport providers, government agencies, and schools. Its trustee-manager is NetLink NBN Management Pte. Ltd.
Investment Overview
NetLink NBN Trust (NLT) holds a monopoly in Singapore fibre network. NLT has a resilient business model which is supported by predictable revenue streams. Its balance sheet and liquidity levels are strong, generating stable cash flows that support future capex and distributions.
High inflation should not eat into distributions. Inflationary pressures on capex and opex are taken into consideration under the Regulated Asset Base (RAB) model. NLT has been allowed a regulatory return of 7% (same as last-term) from April 2024 for a 5-year period. Given that risk-free rate has risen to 3.2% compared to 2.1% seen at the time of its IPO in 2017, we had expected a 20-30 basis points rise in the regulatory return. However, residential pricing has been lowered by just 2% to SGD13.50 per connection while non-residential is unchanged at SGD55 per connection which is in line with our projections. In the Non-building access points (NBAP) segment, which contributes less than 5% of the total revenue, connection price has been lowered by 4.5% to SGD70.50% per connection.
NLT ‘s yield spread of 343 basis points (bps) is attractive compared to its last 3-year average of 314 bps. The Singapore Government’s 10-year bond yield of 3.2% implies a yield spread of 343 bps which is higher than the last 3-year average of 314bps. We expect NLT’s distribution per unit (DPU) to rise by 1-2% annually over the next few years, and the yield spread to narrow towards 250bps, to reflect the resilient nature of its distributions.
Maintain BUY with an unchanged TP of SGD0.98. We model a 250bps yield spread assuming a risk-free rate of 3.0%, to arrive at a target 12-month forward distribution yield of 5.5%.
Risks
Drop in regulatory WACC. In case the regulatory WACC falls below the current 7%, it could result in a lower distribution per unit (DPU) for its unitholders.
Bear case valuation of SGD0.77. Any sharp rise in the risk-free rate from our base-case of 3.0% to 3.5% coupled with NLT’s yield spread hovering around 350bps (vs base case of 250 bps) may lead to our bear-case valuation of SGD0.77.
NetLink NBN Trust (the Trust) is a Singapore-based business trust. It designs, builds, owns and operates the passive fiber network infrastructure comprising ducts, manholes, fiber cables and central offices of Singapore's Next Generation National Broadband Network (Next Gen NBN). Its network provides nationwide coverage to residential homes and non-residential premises in mainland Singapore and its connected islands. For residential homes its network is used for the purpose of end-user fiber connections, such as broadband, Internet-protocol television (TV) and voice over Internet protocol services. It provides d point to-point fire connections, which comprise central office-to-central office fiber connections and central office-to-main distribution frame room fiber connections, among others. It offers fiber services to non-residential end-users, such as shopping malls, transport providers, government agencies, and schools. Its trustee-manager is NetLink NBN Management Pte. Ltd.
Investment Overview
NetLink NBN Trust (NLT) holds a monopoly in Singapore fibre network. NLT has a resilient business model which is supported by predictable revenue streams. Its balance sheet and liquidity levels are strong, generating stable cash flows that support future capex and distributions.
High inflation should not eat into distributions. Inflationary pressures on capex and opex are taken into consideration under the Regulated Asset Base (RAB) model. NLT has been allowed a regulatory return of 7% (same as last-term) from April 2024 for a 5-year period. Given that risk-free rate has risen to 3.2% compared to 2.1% seen at the time of its IPO in 2017, we had expected a 20-30 basis points rise in the regulatory return. However, residential pricing has been lowered by just 2% to SGD13.50 per connection while non-residential is unchanged at SGD55 per connection which is in line with our projections. In the Non-building access points (NBAP) segment, which contributes less than 5% of the total revenue, connection price has been lowered by 4.5% to SGD70.50% per connection.
NLT ‘s yield spread of 343 basis points (bps) is attractive compared to its last 3-year average of 314 bps. The Singapore Government’s 10-year bond yield of 3.2% implies a yield spread of 343 bps which is higher than the last 3-year average of 314bps. We expect NLT’s distribution per unit (DPU) to rise by 1-2% annually over the next few years, and the yield spread to narrow towards 250bps, to reflect the resilient nature of its distributions.
Maintain BUY with an unchanged TP of SGD0.98. We model a 250bps yield spread assuming a risk-free rate of 3.0%, to arrive at a target 12-month forward distribution yield of 5.5%.
Risks
Drop in regulatory WACC. In case the regulatory WACC falls below the current 7%, it could result in a lower distribution per unit (DPU) for its unitholders.
Bear case valuation of SGD0.77. Any sharp rise in the risk-free rate from our base-case of 3.0% to 3.5% coupled with NLT’s yield spread hovering around 350bps (vs base case of 250 bps) may lead to our bear-case valuation of SGD0.77.
Topic
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