On 6 February 2024, NetLink NBN Trust (“NLNT”) announced their 2024 third quarter business update. There are no substantial changes to NLNT this quarter, and their share price continues to trade within the expected range. There is unlikely to be any significant changes next quarter as well, given the updated pricing will only come into effect from 1 April 2024 onwards. The dividend payout in June 2024 should be similar to the previous payouts.
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 | +3.2% | +2.9% |
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 3.2% for the 9 months ending 31 December 2023 when compared to the same period in the previous financial year. This metric is Favorable as NLNT is able to grow their revenue.
Earnings Per Share
| Metrics | Current | Previous |
|---|---|---|
| Earnings per share | No Info | -2.9% |
Based on the announcement on 6 February 2024, earnings per share was not included in the business update for the third quarter of 2024. Though they have mentioned that profit after tax have increased by 4.0% for the 9 months ending 31 December 2023 as compared to the same period in the previous financial year.
This metric was Unfavorable as at 30 September 2023 as NLNT saw a decrease in their profits by 2.9%. This might change with the full year result.
Operating Cash Flows
| Metrics | Current | Previous |
|---|---|---|
| Operating Cash Flows | No Info | -2.4% |
Based on the announcement on 6 February 2024, operating cashflows was not included in the business update for the third quarter of 2024.
This metric was Unfavorable as at 30 September 2023 as operating cashflows saw a decrease by 2.4% to SGD153 million for the first half of FY2024 as compared to SGD157 million in the previous financial year.
Gearing Ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 24.3% | 21.5% |
Gearing ratio stands at 24.3% as at 31 December 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 | 6.8x | 7.0x |
If using the same computation as REITs (EBIT/net interest expense), for the 9 months ending 31 December 2023, the EBIT of the trust is SGD98 million while finance costs is SGD13.8 million. This translates to interest coverage of 6.8 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 13 February 2024 have indicated that interest rates may need to stay high for a longer period as they are waiting for more evidence of easing price pressures before they cut interest rates, after a government report on Tuesday showed consumer inflation stayed elevated last month. This was after increasing the interest rates to a range between 5.25% and 5.50% on 26 July 2023.
Website: Fed seen waiting longer to cut rates as inflation stays elevated
As the interest rate may 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 31 December 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 | 2.7 years | 2.9 years |
Weighted average term to maturity of their debt stands at 2.7 years as at 31 December 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 | 1.27 | 1.28 |
Based on the announcement on 6 February 2024, net asset value was not included in the business update for the third quarter of 2024.
The Price to Book (“P/B”) ratio currently stands at 1.29. This is computed using the closing share price of SGD0.855 on 13 March 2024 and the net asset value per share of SGD0.663 as at 30 September 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 | 6.16% | SGD 0.053 |
| 2022 | 6.07% | SGD 0.052 |
| 2021 | 5.98% | SGD 0.051 |
| 2020 | 5.92% | SGD 0.051 |
| 2019 | 5.80% | SGD 0.050 |
| 2018 | 6.67% | SGD 0.057 |
With the distribution of SGD0.053 per share for the calendar year 2023 and closing share price of SGD0.855 as at 13 March 2024, this translates to a healthy 6.16% dividend yield. For my benchmark, a general reasonable range would be around an average of 5.25% to 6.25%, and NLNT is within the range. The dividend yield is Favorable.
Website: Reasonable Dividend Yield 2024Q1
Key things to note
IMDA Regulatory Review
On 27 November 2023, NLNT has completed the regulatory price review by Infocomm Media Development Authority (“IMDA”). The review determines the new pricing NLNT can charge since 2017 when it was listed.
Website: General Announcement::Completion of Price Review
With the completion of the price review, it is noted that the monthly recurring charge for residential has decreased by 2.17% to SGD13.50 from SGD13.80. Non-building address point has also seen a decrease by 4.47% to SGD70.50 from SGD73.80. No change for non-residential at SGD55.00. These revised prices will take effect from 1 April 2024, with no material impact on the financial year ending 31 March 2024.
The result is that from FY2025 onwards, we are likely to see revenue decrease. Assuming all other costs remain constant, this will translate to lowered profit and likely dividend as well.
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.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Revenue | +3.2% | Favorable |
| Earnings per share | No Info | Unfavorable |
| Operating Cash Flows | No Info | Unfavorable |
| Gearing Ratio | 24.3% | Favorable |
| Interest Coverage | 7.2x | Favorable |
| Debt Maturity Profile | 2.7 years | Favorable |
| Price to Book Ratio | 1.29 | Unfavorable |
| Overall | | Neutral |
Overall, the metrics remain neutral to invest in NLNT. It is expected to remain stable for this and the next quarter given that the new pricing will only take effect from 1 April 2024, and only impact 2025Q1 results onwards. Investors will need to take this into consideration when assessing their own risk appetite.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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