Initiate Buy: Attractive yield supported by fibre growth
Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Issuer of report: The Hongkong and Shanghai Banking Corporation Limited View HSBC Global Research at: https://www.research.hsbc.com MiFIDII–Research:Isyouraccessagreed?CONTACTustoday NetLink NBN Trust (NLT) builds, owns and operates the passive fibre infrastructure in Singapore Near-term growth powered by residential connections moving to fibre, with enterprise and Internet of Things growing quickly Initiate at Buy: attractive yield relative to domestic and regional peers with a stable, highly regulated business model NetLink NBN Trust (NLT) is the listed parent of NetLink Trust, which builds, owns and operates the passive fibre infrastructure in Singapore. Passive fibre infrastructure includes ducts, manholes, fibre cables and Central Offices; these are used by Requesting Licensees to offer services to end-users, both residential and business. Around 80% of revenue was derived from the regulated asset base (RAB) in FY17 (year-end March); the IMDA (Info-communications Media Development Authority) has recently determined a five-year pricing adjustment, due to take effect from 1 January 2018. The company estimates that 97% of its revenue base in FY17 is either regulated or highly stable in nature. Near-term growth powered by residential connections. We expect NLT’s residential connections to grow at a FY17-20e CAGR of 6%, driven by continued migration from ADSL and HFC to fibre. We forecast operating revenues to grow at a FY17-20e CAGR of 6%, and EBITDA to grow at a FY17-20e CAGR of 4.3%, driven by growth in connection and installation revenues. We expect NLT’s EBITDA margin to remain stable at c70%. NLT aims to pay out 100% of cash available for distribution (CAFD). We estimate a distribution of SGD122m in FY18e and SGD179m in FY19e. Initiate at Buy: attractive yield outlook and a highly stable business model. We believe NLT is highly attractive relative to domestic and regional dividend peers: the majority of revenue is regulated (with prices set until end-2022), and it has no overseas exposure or currency risk. Residential connections will drive growth from FY18-20e, as Singapore’s broadband market goes from c82% fibre to 100%. Beyond that we expect steady growth in enterprise and Internet of Things connections. Derive target price of SGD0.90 using a DCF valuation methodology. We apply a blended WACC of 5.3%, and a terminal growth rate of 0.5%, reflecting a stable growth outlook. Our target prices implies a FY18e EV/EBITDA of 15.8x, with a FY18e dividend yield of 3.9%. Key downside risks to our view are regulatory intervention on pricing, fines resulting from Quality of Service infringements, and the renewal of the Facilities-Based Operations License, which expires in 2034. 29 August 2017 INITIATE AT BUY TARGET PRICE (SGD) PREVIOUS TARGET (SGD) 0.90 - SHARE PRICE (SGD) UPSIDE/DOWNSIDE 0.81 +11.2% (as of 25 Aug 2017) MARKET DATA Market cap (SGDm) 3,157 Free float 64% Market cap (USDm) 2,328 BBG NETLINK SP 3m ADTV (USDm) - RIC NETL.SI FINANCIALS AND RATIOS (SGD) Year to 03/2017a 03/2018e 03/2019e 03/2020e HSBC EPS 0.01 0.02 0.02 0.02 HSBC EPS (prev) - - - - Change (%) - - - - Consensus EPS - 0.01 0.02 0.02 PE (x) 67.7 46.9 47.6 50.5 Dividend yield (%) 1.7 3.9 5.7 6.0 EV/EBITDA (x) 21.3 15.8 15.3 14.7 ROE (%) 17.2 3.7 2.0 1.9 52-WEEK PRICE (SGD) Source: Thomson Reuters IBES, HSBC estimates Neale Anderson* Head of Asia Telecoms Research The Hongkong and Shanghai Banking Corporation Limited neale.anderson@hsbc.com.hk +852 2996 6716 Piyush Choudhary*, CFA Telecoms Analyst, South East Asia The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch piyush.choudhary@hsbc.com.sg +65 6658 0607 Saileela Ravuri* Associate, Bangalore * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations NetLink NBN Trust EQUITIES DIVERSIFIED TELECOMS Singapore 0.790.860.9205/17Target price: 0.90High: 0.81 Low: 0.80 Current: 0.81Initiate Buy: Attractive yield supported by fibre growth EQUITIES ● DIVERSIFIED TELECOMS 29 August 2017 2 Financial statements Year to 03/2017a 03/2018e 03/2019e 03/2020e Profit & loss summary (SGDm) Revenue 330 332 342 358 EBITDA 221 230 239 251 Depreciation & amortisation -94 -155 -163 -157 Operating profit/EBIT 127 75 77 94 Net interest -38 -18 -21 -19 PBT 89 57 56 75 HSBC PBT 60 57 56 75 Taxation -14 10 10 -13 Net profit 76 67 66 62 HSBC net profit 46 67 66 62 Cash flow summary (SGDm) Cash flow from operations 165 215 218 216 Capex -117 -274 -120 -60 Cash flow from investment -117 -274 -120 -60 Dividends -52 -122 -179 -189 Change in net debt 33 -1,076 33 33 FCF equity 52 -53 109 159 Balance sheet summary (SGDm) Intangible fixed assets 0 1,291 1,271 1,261 Tangible fixed assets 2,626 2,970 3,034 2,948 Cu
