On 4 November 2024, NetLink NBN Trust (“NLNT”) announced their half year result for FY2025. Management disclosed that the lower prices for key services due to the IMDA Regulatory Review are currently offset by higher connection numbers, therefore NLNT is able to maintain their revenue. However, NLNT is seeing cost increases which is putting downward pressure on their earnings per share.
Historically, NLNT has been paying dividends out of their EBITDA and operating cashflows, and the current cashflow generated from operations is sufficient to pay the estimated annual dividend. However, this resulted in their net asset value per unit seeing large decreases over the last few years. For investors who may be concerned or interested, I have extracted and noted that the net asset value was SGD0.815 per unit as of 31 March 2018. With the current net asset value of SGD0.630 per unit, this indicates a decrease by 22.7% since NLNT have listed on SGX. This has been included in my “Key Things to Note”.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
Website: Financial Statements And Related Announcement::Half Yearly Results
Photo source: https://fifthperson.com/2019-netlink-trust-agm/
Financial Highlights
Revenue
| Metrics | Current | Previous |
|---|---|---|
| Revenue | -0.2% | -2.9% |
| Rating | Neutral | Unfavorable |
Revenue for the first half of FY2025 decreased by 0.2% to SGD204 million when compared to the SGD205 million for the same period in the previous financial year. Management disclosed that the revenue was lower primarily due to lower revenue from ancillary projects (non-RAB revenue), partially offset by higher installation-related revenue and other revenue, Co-location revenue and Central Office revenue.
Although revenue saw a decrease, it is relatively unchanged and is also an improvement from the bigger decrease of 2.9% in the previous quarter. This metric has shifted towards Neutral for this quarter.
Earnings Per Share
| Metrics | Current | Previous |
|---|---|---|
| Earnings per share | -8.8% | No Update |
| Rating | Unfavorable | Unfavorable |
Earnings per share for the first half of FY2025 saw a decrease by 8.8% to SGD0.0124 per share from SGD0.0136 per share for the same period in the previous financial year. The decrease in earnings mainly arose from property, plant and equipment written-off of SGD2 million, and the other costs saw only slight increases across the board. This metric remains Unfavorable.
Operating Cash Flows
| Metrics | Current | Previous |
|---|---|---|
| Operating Cash Flows | -5.6% | No Update |
| Rating | Unfavorable | Neutral |
Operating cash flows for the first half of FY2025 saw a decrease by 5.6% to SGD145 million from SGD153 million for the same period in the previous financial year. The decrease mainly arose from the decrease in profit, though it is offset by an increase in trade and other payables indicating slower repayment to suppliers. The metric shifted to Unfavorable, though currently it is still sufficient to sustain the dividend payout of approximately SGD210 million annually.
Gearing Ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 25.3% | 26.5% |
| Rating | Favorable | Favorable |
Gearing ratio decreased to 25.3% as of 30 September 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 | 6.2x | 6.6x |
| Rating | Favorable | Favorable |
If using the same computation as REITs (EBIT/net interest expense), for the first half of FY2025 the EBIT of the trust is SGD56 million while net finance costs is SGD9 million. This translates to interest coverage of 6.2 times. This metric remains Favorable.
Debt Maturity Profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 1.9 years | 2.1 years |
| Rating | Neutral | Favorable |
Weighted average term to maturity of their debt shortened further to 1.9 years as of 30 September 2024. This metric has shifted towards Neutral, as it indicates that at least half of their debts may be classified as current liabilities over the next few quarters if remain unchanged.
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 1.36 | 1.45 |
| Rating | Unfavorable | Unfavorable |
The Price to Book (“P/B”) ratio became cheaper at 1.36. This is computed using the closing share price of SGD0.855 on 5 December 2024 and the net asset value of SGD0.630 per share as of 30 September 2024. The decrease in P/B ratio was due to the decrease in share price from the previous update, though it still indicates that we are paying a premium for its assets. The P/B ratio metric remains Unfavorable.
As of 5 December 2024, the Market Capitalization is approximately SGD3,332 million.
Website: Yahoo Finance: NetLink NBN Trust (CJLU.SI)
Dividend
| Year | Yield | Total |
|---|---|---|
| 2024 | 6.23% | SGD 0.053 |
| 2023 | 6.16% | SGD 0.053 |
| 2022 | 6.07% | SGD 0.052 |
| 2021 | 5.98% | SGD 0.051 |
| 2020 | 5.92% | SGD 0.051 |
With the final dividend payout in November 2024, the total dividend for the calendar year 2024 amounted to SGD0.053 per share. With a closing share price of SGD0.855 as of 5 December 2024, this translates to a healthy dividend yield of 6.23%. For my benchmark, a general reasonable yield would be around 5.00%. The dividend yield is Favorable.
Website: Reasonable Dividend Yield 2024Q4 – 5.00%
Interest Rate Sensitivity
The Federal Reserve on 7 November 2024 have further slashed interest rate by a quarter point to a range of 4.50% to 4.75%. This is in line with earlier expectations for future rate cuts, which will benefit REITs in general.
Website: Federal Reserve cuts interest rates by a quarter point
The Federal Reserve has subsequently announced on 15 November 2024 that they will cut their key interest rate slowly and deliberately in the coming months, in part because inflation has shown signs of persistence, and the officials want to see where it heads next.
Website: Powell says Fed will likely cut rates cautiously given persistent inflation pressures
As the interest rate may change further, NLNT may be subjected to change in their cost of debt. Their debt profile as of 30 September 2024 is as below.
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $810,000 |
| Debt Not Hedged (%) | 25.9% |
| Debt at Floating Rate Exposed | $209,790 |
| EBITDA FY2024 | $292,399 |
I have thus performed a sensitivity analysis using the information.
| Change in Interest Rates | Change in Distributable Income (SGD’000) | Change as % of FY2024 EBITDA |
|---|---|---|
| 50 bps | $1,049 | 0.4% |
| 100 bps | $2,098 | 0.7% |
| 150 bps | $3,147 | 1.1% |
| 200 bps | $4,196 | 1.4% |
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 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 half 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. NLNT had a net asset value of SGD0.815 per unit as of 31 March 2018, and it has decreased since then. 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.
Website Annual Reports And Related Documents
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 | -0.2% | Neutral |
| Earnings per share | -8.8% | Unfavorable |
| Operating Cash Flows | -5.6% | Unfavorable |
| Gearing Ratio | 25.3% | Favorable |
| Interest Coverage | 6.2x | Favorable |
| Debt Maturity Profile | 1.9 years | Neutral |
| Price to Book Ratio | 1.36 | Unfavorable |
| Overall | Neutral |
Overall, the metrics for NLNT remain unchanged at Neutral. The financial performance is relatively managed, given the IMDA Regulatory Review has lowered the prices for key services with effect from 1 April 2024. Investors will need to monitor over the next few quarters if there are any adverse impacts.
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.
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Website: NetLink NBN Trust (SGX: CJLU): 2025 First Quarter Business Update
