On 17 August 2023, NetLink NBN Trust (“NLNT”) recently announced their 2024 first quarter business update. Their results have continued to be stable, with no significant change in the metrics. Something investors should keep in mind however is the increase in gearing this quarter although there has been no change to the gross debt of SGD735 million from the previous quarter. The reason for this is the effect of paying distributions based on EBITDA, as historically their earnings per share is not sufficient for the dividend payout.
The most anticipated results of the IMDA review was not included, and it is likely to be delayed till end of 2023. While there is no cause of concern, it is possible for share price to fluctuate given the uncertainty and investors should take note.
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 | +6.2% | +6.8% |
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 6.2% for the first quarter of FY2024 when compared to the same period in the prior financial year. The increase was mainly contributed from more ancilliary projects and connection orders. This metric is Favorable as NLNT is able to grow their revenue.
Earnings Per Share
| Metrics | Current | Previous |
|---|---|---|
| Earnings per share | No Info | +19.7% |
Based on the announcement on 17 August 2023, earnings per share was not included in the business update for the first quarter of 2024. Though they have mentioned that profit after tax have increased by 2.1% for the 3 months ending 30 June 2023 as compared to the same period in the previous financial year.
This metric as at 31 March 2023 was Favorable as NLNT was able to grow their profits by 19.7% to SGD0.028 per share in FY2023 as compared to SGD0.023 per share in FY2022.
Operating Cash Flows
| Metrics | Current | Previous |
|---|---|---|
| Operating Cash Flows | No Info | +10.4% |
Based on the announcement on 17 August 2023, operating cashflows was not included in the business update for the first quarter of 2024.
This metric as at 31 March 2023 was Favorable as NLNT operating cashflow was able to grow organically by 10.4% to SGD286 million for FY2023 as compared to SGD259 million in the previous financial year.
Gearing Ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 23.6% | 20.3% |
Gearing ratio stands at 23.6% as at 30 June 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.
It is worth nothing however that there were no changes to the gross debt from the prior quarter. Therefore the increase in gearing ratio is an effect from paying distributions out of cash flows and reducing their net asset value, as further discussed in the “Key things to note” below.
Interest Coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 7.0x | 9.2x |
If using the same computation as REITs (EBIT/net interest expense), for the first quarter of FY2024 the EBIT of the trust for the first quarter is SGD32 million while finance costs is SGD4.5 million. This translates to interest coverage of 7.0 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 25 August 2023 have announced that they may need to raise interest rates further to cool the still-too-high inflation, despite having increased the interest rates to a range between 5.00% and 5.25% on 26 July 2023, the highest level in 22 years.
Website: Fed’s Powell: higher rates may be needed, will move ‘carefully’
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 69.4% of their debt are fixed rates.
I have thus performed a sensitivity analysis using the information as at 30 June 2023:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $735,000 |
| Debt Not Hedged (%) | 30.6% |
| Debt at Floating Rate Exposed | $224,910 |
| 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 | -$1,125 | -0.4% |
| + 100 bps | -$2,249 | -0.8% |
| + 150 bps | -$3,374 | -1.1% |
| + 200 bps | -$4,498 | -1.5% |
| + 250 bps | -$5,623 | -1.9% |
| + 300 bps | -$6,747 | -2.3% |
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 | 3.2 years | 3.4 years |
Weighted average term to maturity of their debt stands at 3.2 years as at 30 June 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 | 1.28 | 1.35 |
Based on the announcement on 17 August 2023, net asset value was not included in the business update for the first quarter of 2024.
The Price to Book (“P/B”) ratio currently stands at 1.28. This is computed using the closing share price of SGD0.865 on 31 August 2023 and the net asset value per share of SGD0.675 as at 30 June 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 | 3.03% | SGD 0.026 |
| 2022 | 6.00% | SGD 0.052 |
| 2021 | 5.91% | SGD 0.051 |
| 2020 | 5.85% | SGD 0.051 |
| 2019 | 5.73% | SGD 0.050 |
| 2018 | 6.57% | 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 SGD0.865 as at 31 August 2023, this translates to a healthy 6.00% 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 2023Q3
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 reporting date.
IMDA Regulatory Review
NLNT is currently undergoing a regulatory price review by Infocomm Media Development Authority (“IMDA”). 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 | +6.2% | Favorable |
| Earnings per share | No Info | Favorable |
| Operating Cash Flows | No Info | Favorable |
| Gearing Ratio | 23.6% | Favorable |
| Interest Coverage | 7.0x | Favorable |
| Debt Maturity Profile | 3.2 years | Favorable |
| Price to Book Ratio | 1.28 | Unfavorable |
| Overall | | Favorable |
Overall, the metrics indicate that it is favorable to invest in NLNT, and the fundamentals of NLNT remained stable this quarter. Currently there is no reason to be concerned with the outcome of the regulatory review. However, it is something 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.
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Website: NetLink NBN Trust (SGX: CJLU): 2023 Full Year Result
