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AnalysisSGX

10 things I learned from the 2022 Netlink Trust AGM

NetLink NBN Trust, established in 2017 as an initiative promoted by the Singapore government, primarily owns the only nationwide fibre infrastructure network supporting Singapore’s Next Generation Nationwide Broadband Network (Next Gen NBN).

Netlink designs, builds and operates the passive fibre network infrastructure comprising of ducts, manholes, fibre cables, and central offices. The primary aim of Next Gen NBN is to enhance competitiveness of the Singapore economy through nationwide ultra-high-speed broadband access. By providing an open, wholesale fibre access, telecommunication operators can focus on offering cost-effective innovative products to consumers and businesses without incurring high initial fixed costs.

Here are 10 things I learned from the 2022 Netlink AGM.

1. Revenue for FY22 was 2.5% higher year-on-year at S$377.6 million. The growth was mainly due to higher residential, non-residential, NBAP and segment connections revenue, installation-related revenue, and ancillary project revenue. This was partially offset mainly by lower Central Office revenue. 

EBITDA decreased marginally by 1.2% to S$266.9 million mainly due to a remeasurement loss of S$12.4 million relating to finance lease receivables arising from the reduction in rental rates upon the renewal of Central Office lease agreements with the lessee from September 2021. The reduction in rental rates, however, did not have a material cashflow impact for FY22 nor is it expected to have a material cashflow impact on each of the subsequent years.

The EBITDA variance was also due to S$5.7 million lower net government grants received in FY22 and a S$7.4 million write-off of a capitalised project costs in FY21 in relation to the discontinuation of an IT contract.

2. Residential connections remain the largest contributor to Netlink’s revenue at 63.8%. Revenue from residential connections increased by S$2.8 million to S$240.7 million in FY22. Growth decelerated primarily due to pandemic-related delays in new residential construction and renovations progress. However, towards the tail end of FY22, construction activity has pickup since the government lifted restrictions and border controls. Constructions projects that have resumed would see a boost in residential connections in FY23. In addition, Netlink continued its IMDA programs to connect low-income households.

3. Non-residential connections is a competitive segment for the company. NetLink has managed to garner a respectable 35% market share, which contributes roughly 8% of the company’s total revenue in FY22. This segment saw a connection growth rate of 4.5% vs FY21.

4. Non-building address points (NBAP) are fibre connections to other areas apart from physical buildings. A non-exhaustive list of examples of NBAP are lamp posts, WiFi hotspots, outdoor cameras, etc. NBAP is Netlink’s the second fastest-growing segment, achieving 20.4% growth in FY22. Growth was driven primarily from mobile rollouts and smart nation deployments. 

5. Segment (point-to-point) connections include Central Office-to-Central Office, building-to-building, Central Office-to-building, and building-to-end user connections. Segment connections are Netlink’s fastest growing segment. Connection growth grew by 65.9% compared to FY21. Main source of growth came from mobile network rollout and projects that requires high resiliency deployment.

6. The CEO highlighted five key strategic areas where Netlink will focus on for the foreseeable future. First, to improve its network reach, diversification, and capability in support of Netlink’s fibre-to-anywhere deployment. Second, to improve its competitiveness in the enterprise and government business segment. Third, to seek a favourable outcome for the upcoming regulatory price review. Fourth, to explore possible expansion overseas by investing in foreign telecoms infrastructure which is able to generate stable cash flow. Lastly, to focus on branding to gain customer loyalty and achieve brand affinity.

7. Netlink has been ranked first in the Governance Index for Trusts in 2021 for the third year running. During the AGM, the CFO highlighted the following sustainability achievements:

  • In business practices, they maintained islandwide fibre coverage with 99.99% network availability. Additionally, there has been zero cases of corruption, breach of laws, and data breaches (both personal and company related).
  • Maintained their track record of zero cases of non-compliance on waste disposal practices and achieved a scrap rate of 1% on fibre cables issued during the year.
  • Had good employee management as they achieved zero incidents of discrimination, fatalities, and injuries. Furthermore, Netlink achieved an employee turnover rate of 15.4% which is lower than the high-tech industry turnover rate of 16.5%.

8. In this year’s sustainability report, Netlink worked with a consultant and devised a strategy to achieve net zero carbon emissions by 2050. A few of the possible initiatives include replacing existing lights with motion sensor lights, installing detection systems to detect leakage of refrigerants, and replace existing chillers with more energy efficient refrigerants. The nearer term target is to reduce carbon emissions 50% by FY2030.

9. A shareholder asked about the compliance costs for ESG requirements and whether it would have a negative impact on the bottom line. The management responded that they are in fact seeing positive impact (with longer-term sustainability) and cost reductions while keeping with the objective to achieve a target of carbon neutrality by 2030. Cutting waste during installation and improving deployment efficiencies are some examples of the cost reduction achievements.

10. A couple of shareholders asked about the impact of Singapore’s 5G rollout on Netlink. This question has been posed many times to management in the past about the perceived negative impact of the ongoing 5G rollout. At face value, it may seem that 5G may one day replace fibre as the primary means of high-speed connectivity. However, on the contrary, mass 5G adoption is actually complementary as there will be higher demand for fibre connectivity via base stations which essentially forms the backbone of 5G infrastructure. It is expected that revenue will improve with the increased use of 5G. There will only be a slight increase in capex since the main infrastructure network is already in existence and only requires additional end point base station installations. 

The fifth perspective

Netlink Trust is the epitome of a monopoly that enjoys a wide economic moat combined with durable, recurrent streams of cash flow. The adoption of 5G will further complement organic growth with the increased need for bandwidth via of the use of Netlink’s fibre infrastructure. Offering around 5% in yield, Netlink is a passive investment suited for those looking for a mid to long-term dividend play.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

Teh Weiyang

Weiyang is an aspiring analyst in the fields of investment banking and private equity. Putting his money where his mouth is has inadvertently led him to learn extensively about risk management, asset allocation and fundamental valuation methodologies. He is currently a Private Equity Analyst intern at SME Ventures and also a Macroeconomics Analyst for Victoria Investment Fund. On the academic front, he is pursuing a business degree at the National University of Singapore with double majors in Finance and Quantitative Finance.

2 Comments

  1. Hi, thanks for writing this article. There’s a few concerns I’d like to highlight based off the latest financial statements:
    1. Free cash flow of 185m vs dividend payout of 199m, do you feel the div payout is sustainable through net income growth in the future?
    2. ROE is low at 3.3%, i didnt not calculate the exact WACC, but the cost of capital is surely higher than the return on equity of 3.3%.
    3. Note 21, where they wrote their wacc is 5.3% and terminal growth 1.5%. Do you think 5.3% too low? The 30yr rate is 3.07%, meaning the equity risk premium is only 2.23%, lesser than the 30yr gov bonds?
    4. Assuming the current mkt cap of 3.6bil is fairly valued. I did a quick div discount calculation, the implied discount rate should be around 7% which makes more intuitive sense that the sg index yields approx that figure over long run.
    * Div/(r-g) , g = 1.5%

    A good business can become a bad investment when one pays too much. Wonder what are your thoughts this?

    1. Hi Lewis,

      1. You’re spot on. The payout was even higher at 120% when Netlink first listed, yet it has continued to deliver consistent dividends over the last five years. On a side note, the management has mentioned that they are taking on more debt for development CAPEX. So we have to monitor Netlink’s debt levels, which are still manageable at this stage.

      2. Netlink is a trust, so ROE is not the best measure. Perhaps you could use return on free cash flow as depreciation/amortization is included.

      3. It is debatable, but investors think that Netlink is a stable investment which leads to lower WACC. Its valuation suggests the same.

      4. If it doesn’t hit your targeted price/yield, you can wait for a correction. We’ve been waiting for years!

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