Brokers' take: DBS upgrades NetLink to 'buy' on attractive yield, low-risk profile
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NETLINK NBN Trust CJLU posts a low-risk profile, with its distributions likely to remain unaffected by rising inflation and stay resilient amid a stable regulatory rate of return, said DBS Group Research in a report on Wednesday (Mar 9).
Analyst Sachin Mittal upgraded the counter to a "buy" call from "hold", and raised its target price to S$1.05 from S$1.02, noting that its 5.4 per cent yield is "attractive".
Units of NetLink, which owns and operates fibre network infrastructure in Singapore, closed at S$0.975 on Wednesday, up 1 per cent or S$0.01.
A sizable portion of NetLink's earnings are determined under the regulated asset base model, which has a regulatory rate of return currently set at 7 per cent.
Mittal expects the risk-free rate in Singapore will be 2.1 per cent in FY2022 and 2.2 per cent in FY2023, which should in turn minimise the risk of a drop in the regulatory rate of return during the next period of review from January 2023 to December 2027. The risk-free rate was 2.1 per cent when NetLink first listed.
While the residential interconnect rate could drop by 10-12 per cent to maintain the regulatory rate, NetLink should see a growth in subscribers to reach a new high by FY2027, he said.
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The analyst also expects NetLink's distribution yield spread will narrow to 300 basis points from its current 350 bps to reflect its lower risk profile. The company's historical distribution yield spread average is at 310 bps.
As for inflation, while it may put pressure on capital expenditure and operating expenses, Mittal said as long as NetLink factors in the impact of inflation in its forecasts to the regulator, it should be able to secure a regulated rate that can mitigate rising costs.
Its distributions of around S$200 million should also be supported by its annual operating cash flow of around S$270 million, while its balance sheet is strong enough to fund future capex and acquisitions, Mittal added.
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