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INITIATE COVERAGE
NetLink NBN Trust (NetLink SP)
Buy | Price/Tgt: S$0.805/S$0.93 | Mkt Cap: S$3,137.1m
Unassailable Foundation Of Next Gen NBN
NetLink NBN Trust operates the only passive fibre infrastructure to provide wholesale dark fibre services for ultra-high-speed fibre connections in SIngapore. It has a dominant market share of 81.7% for residential and 30.8% for non-residential connections, where growth is projected at 5-year CAGR of 7.2% and 10.1% respectively for 2016-21. The Smart Nation initiative also provides numerous opportunities for growth. Initiate coverage with BUY. Target price: S$0.93.
· Futile to replicate NetLink’s extensive passive infrastructure. NetLink NBN Trust (NetLink) is the sole network company for Next Gen NBN. Its extensive nationwide coverage acts as a barrier to entry. To date, NetLink has received aggregate grants of S$732m for the construction of passive fibre infrastructure. Without similar support from the government, it would be almost impossible for any potential competitor to provide a viable alternative or meet current regulated wholesale pricing.
· Defensive and regulated cash flows. NetLink possesses resilient, predicatable, transparent and regulated revenue streams. Competition or churn among retail service providers does not affect the number of fibre connections provided by NetLink. NetLink’s customers are established players in the telecommunications industry in Singapore.
· Growth from Smart Nation initiative. The Smart Nation platform is a government initiative to build a pervasive network of sensors and probes deployed to collect real-time environmental information, process it and share it among government agencies and private sector participants. Smart Nation would have a positive impact on demand for NetLink’s NBAP connections.
· Growth propelled by migration from ADSL and HFC to fibre connections. Independent industry consultant Media Partners Asia (MPA) estimated the penetration for legacy ADSL and HFC-based connections at 17.9% as of Mar 17. MPA expects all ADSL subscribers to migrate to fibre connections by Dec 19, and HFC-based services to cease by Dec 21. As such, residential fibre broadband subscribers are projected to increase at a 5-year CAGR of 7.2% in 2016-21.
· SMEs drive demand for non-residential connections. Growth drivers for the non-residential segment include SMEs and cloud-based applications. To encourage the adoption of fibre broadband among SMEs, the government has provided a 50% subsidy capped at S$120/month for up to 24 months for SMEs subscribing to fibre broadband plans with speeds of at least 100Mbps. MPA projects non-residential fibre broadband subscribers to grow at a 5-year CAGR of 10.1% in 2016-21.
· Initiate coverage with BUY. Our target price of S$0.93 is based on DCF methodology (cost of equity: 6.5%, terminal growth: 2.0%). The stock provides attractive distribution yield of 5.2% (annualised) and 6.0% for FY18 and FY19 respectively.
