On 2 August 2024, NetLink NBN Trust (“NLNT”) announced their business update for the first quarter of FY2025. There may be some initial signs of the regulatory price review, with revenue and profit after tax decreasing slightly. Do note that with potential interest rate cuts next week, NLNT may see a reduction in finance costs moving forward, which in turn will provide support for their earnings per share and dividend payout. Investors should keep an eye out on the Federal Open Market Committee announcement next week.
Unlike Real Estate Investment Trusts (“REITs”), NLNT is a business trust and are not imposed the same regulations as REITs.
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 | -2.9% | +1.9% |
Revenue decreased by 2.9% to SGD101 million for the first quarter of FY2025 when compared to the SGD104 million for the same period in the previous financial year. The decrease was due to lower revenue from ancillary projects. This metric has shifted towards Unfavorable.
Earnings Per Share
| Metrics | Current | Previous |
|---|---|---|
| Earnings per share | No Info | -5.4% |
Based on the announcement on 2 August 2024, earnings per share was not included in the business update for the first quarter of FY2025. However, they have disclosed that profit after tax have decreased by 9.1% when compared to the same period in the previous financial year.
Together with the decrease in earnings per share by 5.4% to SGD0.0265 per share for the financial year ending 31 March 2024, this metric remains Unfavorable.
Operating Cash Flows
| Metrics | Current | Previous |
|---|---|---|
| Operating Cash Flows | No Info | +1.0% |
Based on the announcement on 2 August 2024, operating cashflows was not included in the business update for the first quarter of FY2025.
The metric was Neutral as of 31 March 2024 as operating cash flows generated have remained relatively unchanged, though it was able to generate consistent cashflows to sustain the dividend payout of approximately SGD210 million annually.
Gearing Ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 26.5% | 23.1% |
Gearing ratio decreased to 26.5% as of 30 June 2024. This metric remains 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 | 6.6x | 6.5x |
If using the same computation as REITs (EBIT/net interest expense), for the first quarter of FY2025 the EBIT of the trust is SGD29 million while finance costs is SGD4 million. This translates to interest coverage of 6.6 times. This is Favorable in my opinion. The reason NLNT can 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.
Debt Maturity Profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 2.1 years | 2.4 years |
Weighted average term to maturity of their debt shortened further to 2.1 years as of 30 June 2024. This metric remains Favorable and it allows them sufficient time to refinance their debts as they fall due. However, it is getting close to my 2.0 years benchmark.
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 1.45 | 1.34 |
Based on the announcement on 2 August 2024, net asset value was not included in the business update for the first quarter of FY2025.
The Price to Book (“P/B”) ratio became more expensive at 1.45. This is computed using the closing share price of SGD0.935 on 11 September 2024 and the net asset value of SGD0.647 per share as of 31 March 2024. This P/B ratio indicates that we are paying a premium for its assets. The P/B ratio metric is thus Unfavorable.
As of 11 September 2024, the Market Capitalization is approximately SGD3,644 million.
Dividend
| Year | Yield | Total |
|---|---|---|
| 2024 | 2.83% | SGD 0.027 |
| 2023 | 5.64% | SGD 0.053 |
| 2022 | 5.55% | SGD 0.052 |
| 2021 | 5.47% | SGD 0.051 |
| 2020 | 5.41% | SGD 0.051 |
| 2019 | 5.30% | SGD 0.050 |
For the first half of the calendar year 2024, NLNT distributed SGD0.027 per share which is relatively consistent with what was paid out in 2023. When annualised, this will amount to SGD0.054 per share using the first half payout as a base.
With a closing share price of SGD0.935 as of 11 September 2024, this translates to a healthy dividend yield of 5.78%. For my benchmark, a general reasonable yield would be around 5.75%, and NLNT is around the range. The dividend yield is Favorable.
Website: Reasonable Dividend Yield 2024Q3 – 5.75%
Interest Rate Sensitivity
The Federal Reserve on 23 August 2024 has signaled that they are ready to cut interest rates, confident that inflation is easing to normal levels and wary of any more slowing in the job market. This was after increasing the interest rates to a range between 5.25% and 5.50% on 26 July 2023. Take note however that there were no specific timeline or forecasts, though market expectations are that the cut will happen in September 2024.
Website: Fed Chair Powell: ‘The time has come’ for interest rate cuts
As the interest rate may increase further, NLNT may be subjected to significant change in their cost of debt in the near future. Their debt profile as of 30 June 2024 is as below.
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $790,000 |
| Debt Not Hedged (%) | 24.1% |
| Debt at Floating Rate Exposed | $190,390 |
| EBITDA FY2024 | $292,399 |
I have thus performed a sensitivity analysis using the information.
| Change in Interest Rates | Decrease in Distributable Income (SGD’000) | Change as % of FY2024 EBITDA |
|---|---|---|
| + 50 bps | -$952 | -0.3% |
| + 100 bps | -$1,904 | -0.7% |
| + 150 bps | -$2,856 | -1.0% |
| + 200 bps | -$3,808 | -1.3% |
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 EBITDA accordingly which may in turn affect distribution.
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 may see revenue decrease. Assuming all other costs remain constant, this will translate to lowered profit and likely dividend as well. This has been noted with the business update for the first quarter of FY2025 where revenue and profit after tax saw decreases.
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 of reporting date.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Revenue | -2.9% | Unfavorable |
| Earnings per share | No Info | Unfavorable |
| Operating Cash Flows | No Info | Neutral |
| Gearing Ratio | 26.5% | Favorable |
| Interest Coverage | 6.6x | Favorable |
| Debt Maturity Profile | 2.1 years | Favorable |
| Price to Book Ratio | 1.45 | Unfavorable |
| Overall | Neutral |
The overall metrics for NLNT remain unchanged at Neutral. We are still seeing the initial stages of the impact of the regulatory price review, though it did not adversely affect the financial performance of NLNT. The upcoming interest rate cuts may help to provide support to the bottom line and negate future negative impacts. Investors will need to take this into consideration when assessing their risk appetite.
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): 2024 Full Year Result
