On 18 May 2023, NetLink NBN Trust (“NLNT”) recently announced their 2023 full year result. Their results have shown to be stable, and the share price have increased recently likely due to the anticipation of the dividend which has an ex date tomorrow on 30 May 2023. They are well-positioned to ride through the current uncertainties in the market, which includes recession, inflation and interest rate risks.
This results of the IMDA review which should be concluded soon over the next few months, and the share price can easily fluctuate in either direction depending on the outcome. A short-term risk in 2023 which investors need to take note of.
Website: Financial Statements And Related Announcement::Full Yearly Results
Photo source: https://fifthperson.com/2019-netlink-trust-agm/
Background
NLNT was established in 2017 primarily for the purpose of owning all of the units of NetLink Trust (“NLT”), through which NLNT owns the only nationwide fibre network supporting Singapore’s Next Generation Nationwide Broadband Network (“Next Gen NBN”).
NLNT designs, builds, owns and operates the passive fibre network infrastructure of Singapore’s Next Gen NBN. An initiative led by the Singapore government, the Next Gen NBN aims to enhance the competitiveness of the economy through nationwide ultra-high-speed broadband access. By providing an open, wholesale access to our fibre network, telecommunication operators can focus on offering innovative products and services to consumers and businesses without incurring high fixed costs.
NLNT offer primarily three types of end user connections:
- Residential
- Non-residential
- Non-Building Address Point (NBAP)
NLNT was listed on the Main Board of the Singapore Exchange Securities Trading Limited on 19 July 2017. It is a constituent of the FTSE ST Large & Mid Cap Index, FTSE ST Singapore Shariah Index and the MSCI Global Small Cap – Singapore Index.
Key Metrics
Revenue
| Metrics | Current | Previous |
|---|---|---|
| Revenue | +6.8% | +6.5% |
Unlike Real Estate Investment Trusts (“REITs”), NLNT is a business trust and are not imposed the same regulations as REITs.
It was noted that revenue have increased by 6.8% for FY2023 when compared to FY2022. This metric is Favorable as NLNT is able to grow their revenue.
Earnings Per Share
| Metrics | Current | Previous |
|---|---|---|
| Earnings per share | +19.7% | No Info |
NLNT has seen their earnings per share increased by 19.7% for FY2023 to SGD0.028 per share from SGD0.0234 in the previous financial year. The increase was due to a more than proportionate increase of revenue of 6.8% whereas total expenses only increased by 2.2%.
This metric is Favorable as NLNT was able to grow their profits and continue to ensure the dividends are sustainable.
Operating Cash Flows
| Metrics | Current | Previous |
|---|---|---|
| Operating Cash Flows | +10.4% | No Info |
Operating cashflows have also seen an increase by 10.4% to SGD286 million for FY2023 as compared to SGD259 million in the previous financial year. This was mainly due to the increase in profit before income tax and no substantial change to the remaining cashflows line items.
This metric is Favorable.
Gearing Ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 20.3% | 21.6% |
Gearing ratio stands at 20.3% as at 31 March 2023. This is considered Favorable as there is sufficient headroom for NLNT to pursue growth opportunities and they will not be weighed down significantly by interest rate changes.
Interest Coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 9.2x | 9.2x |
If using the same computation as REITs (EBIT/net interest expense), for FY2023 the EBIT of the trust is SGD124 million while finance costs is SGD15 million. This translates to interest coverage of 9.2 times and thus there is sufficient interest coverage.
This is Favorable in my opinion. The reason NLNT is able to have sufficient interest coverage is due to its low gearing. NLNT is well positioned as interest rates continue to rise as the world looks to tackle inflation. The Federal Reserve on 3 May 2023 has hiked the interest rates to a range between 5.00% and 5.25%, the highest level in 15 years and are likely to keep it at these levels over the next few years.
Website: US Fed raises interest rates again, signals potential pause in tightening cycle
As the interest rate may potentially increase further, NLNT may be subjected to significant change in their cost of debt in the near future. In their presentation they have mentioned that 68.4% of their debt are fixed rates.
I have thus performed a sensitivity analysis using the information as at 31 March 2023:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $735,000 |
| Debt Not Hedged (%) | 31.6% |
| Debt at Floating Rate Exposed | $232,260 |
| EBITDA FY2023 | $294,979 |
Interest rate sensitivity analysis as below:
| Change in Interest Rates | Decrease in Distributable Income (SGD’000) | Change as % of FY2023 Distribution |
|---|---|---|
| + 50 bps | -$1,161 | -0.4% |
| + 100 bps | -$2,323 | -0.8% |
| + 150 bps | -$3,484 | -1.2% |
| + 200 bps | -$4,645 | -1.6% |
| + 250 bps | -$5,807 | -2.0% |
| + 300 bps | -$6,968 | -2.4% |
Do note the above is my estimation which may be different from management’s estimation. Nonetheless, if the interest rates were to increase by the basis points above, NLNT may experience a fall in DPU accordingly.
Debt Maturity Profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 3.4 years | 3.7 years |
Weighted average term to maturity of their debt stands at 3.4 years as at 31 March 2023. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 1.35 | 1.18 |
The Price to Book (“P/B”) ratio currently stands at 1.35. This is computed using the closing share price of SGD0.910 on 29 May 2023 and the net asset value per share of SGD0.675 as at 31 March 2023.
This P/B ratio indicates that we are paying a premium for its assets. Considering that this is an asset that is relatively stable with no significant expansion plans, the P/B ratio metric is thus Unfavorable.
Dividends
| Year | Yield | Total |
|---|---|---|
| 2023 | 2.88% | SGD 0.026 |
| 2022 | 5.70% | SGD 0.052 |
| 2021 | 5.62% | SGD 0.051 |
| 2020 | 5.56% | SGD 0.051 |
| 2019 | 5.45% | SGD 0.050 |
| 2018 | 6.24% | SGD 0.057 |
With the distribution of SGD0.026 per share for the first half of the calendar year 2023, it is on track to be similar with the distribution for the calendar year 2022 of SGD0.052 per share. With this expected distribution and closing share price of SGD0.910 as at 29 May 2023, this translates to a healthy 5.70% dividend yield. For my benchmark, a general reasonable range would be around an average of 5.5% to 6.5%, and NLNT is within the range.
Website: Reasonable Dividend Yield 2023Q2
It is worth noting that interest for long-term safe assets have stabilized and is on a downtrend. The June 2023 Singapore Savings Bond being issued with a 10-year average interest rate of 2.81%. There is a chance for interest rates may not increase significantly moving forward, and the required dividend yield of investor may be lower than current.
Website: SBJUN23 GX23060E Bond Details
The dividend yield is Favorable.
Key things to note
Growing towards asset light
NLNT by no means it is an asset light Company. However from an accounting point of view, they have been paying out dividends that are higher than their earnings. This is possible because of the high depreciation, which is a non-cash adjusting expense, resulting in high EBITDA as compared to profits.
For illustration purposes, imagine a scenario where you are in the business of car rental. The useful life of cars in Singapore companies are generally 10 years. This is due to the Certificate of Entitlement (“COE”) lasts only 10 years, and the value of the car is thus depreciated over its 10 years useful life. However, over the course of the 10 years, at the end of the useful life with the expiry of the COE, you will need to pay an equivalent amount to purchase a new car with a new 10 year COE. The new purchase would not be possible if you pay out dividends based on EBITDA and have no cash savings from the dividend expense.
What management is saying is that the assets of NLNT do not have a high replacement cost at the end of its useful life. and the assets will still be able to continue to operate indefinitely. Thus they do not need to save money from the depreciation expense for a potential replacement of the assets.
The result is that the net asset value of the Company will continue to decrease as they continue to pay out the dividends sustained using EBITDA. Eventually if they would like to secure new financing, their balance sheet will seem to have insufficient assets to pledge as collateral for new borrowings.
Investors will need to take note if they are comfortable with the idea that their assets are able to last longer than the pre-determined useful lives as at 31 March 2023.
IMDA Regulatory Review
NLNT is currently undergoing a regulatory price review by Infocomm Media Development Authority (“IMDA”) which could finalize soon in mid-2023. The review will determine the new pricing NLNT can charge since 2017 when it was listed.
IMDA sets the pricing for NetLink’s services to the various telcos under the “Interconnection Offer” (“ICO”). Prices under the ICO will be regulated using the Regulated Asset Base (“RAB”) model whereby NetLink can recover certain cost components from the regulator.
The return on capital is for five years starting from January 2018 and is currently set at 7%. Should the rate of return fall below 7%, this may impact the trust’s ability to recover expenses under the RAB, thus impacting its distribution per unit.
The reason that there is a concern that the return on capital might be lowered is because NLNT is a direct service link to all segments, residential, non-residential, and non-building address points. Given the higher cost of living over the last few months with inflation, cutting prices at NLNT is an indirect way to provide some financial relief to the daily consumers.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Revenue | +6.8% | Favorable |
| Earnings per share | +19.7% | Favorable |
| Operating Cash Flows | +10.4% | Favorable |
| Gearing Ratio | 20.3% | Favorable |
| Interest Coverage | 9.2x | Favorable |
| Debt Maturity Profile | 3.4 years | Favorable |
| Price to Book Ratio | 1.35 | Unfavorable |
| Overall | | Favorable |
Overall, the metrics indicate that it is favorable to invest in NLNT. The only shift in metrics is the price to book ratio which has increase recently due to the dividend ex date on 30 May 2023 and the share price have risen significantly. Excluding this, the share price have been relatively stable within expected range, and the fundamentals of NLNT did not worsen during this quarter.
With the outcome of the regulatory review coming soon, investors need to consider their own risk appetite before investing, as there is possibility for the share price to fluctuate significantly in either direction.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
Previous Post
Website: NetLink NBN Trust (SGX: CJLU): 2023 Third Quarter Business Update
Thanks for the article.
2 things that I’m not comfortable with about NLink. The EPS is very much lower than the DPS like only 30%+. How sustainable is tbat?
And the NAV keep decreasing with each dividend payment. It’s like taking our money and returning it to us every 6 monthsbin installment. You have wrote about these which is good compared to others who didn’t.
I’m not vested.
Thank you for reading Retired Uncle. Yes the distributions more than EPS will continue to decrease the NAV. Only time will tell if their assets really do not need high replacement costs.