Brokers’ take: Analysts split on NetLink NBN Trust despite ‘healthy’ yields

MAYBANK Securities and DBS Research are split in their calls on NetLink NBN Trust, following the release of the fibre network infrastructure provider’s half-year results.

Maybank upgraded NetLink : CJLU 0% to “buy” with a slightly higher target price of S$1.02, compared with S$1 previously, on the belief that its current share price level presents a “good opportunity to accumulate”. 

Maybank’s research team, in a Thursday (Nov 3) report, revised its target after raising its profit after taxation and minority interests (Patmi) forecasts for FY2023 and FY2024 by 3.3 per cent and 3.4 per cent respectively. This was in response to NetLink’s H1 FY2023 Patmi jumping ahead of its expectations, due to a surge in the company’s ancillary project revenue. 

The research team also believes that accumulating the stock is timely, as it offers value at the current level with a 6 per cent sustainable dividend yield. Moreover, an upcoming government pricing decision presents an opportunity for NetLink to justify a higher rate of return amid rising cost expectations.

Looking ahead, the researchers note that soaring interest rates remain a “pivotal risk” to the share price performance, as the yield gap between NetLink’s dividend yield and 10-year Singapore interest rate is below mean. However, they find this unlikely to impact the forecast dividend payout for FY2023.

Maybank’s research team also sees “good debt headroom for higher borrowings to tide through any near-term shortfall” given the company’s low net gearing as at end-September. 

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DBS analyst Sachin Mittal expressed similar optimism, believing that “high inflation should not eat into distributions” while forecasting an annual 2 per cent rise in distribution per unit over the next few years.

However, current market conditions led Mittal to opt for a valuation method that reflects this volatility – leading to a downgrade on the stock to “hold” from “buy” with a lower target price of S$0.90 from S$1.05. 

The downgrade comes as Mittal sees limited upside to the stock, while the revised target price is modelled on a yield spread of 250 basis points, assuming a 3.5 per cent risk-free rate that translates to an estimated 12-month distribution yield of 6 per cent.

In the analyst’s view, there is potential for NetLink to raise its distributions in FY2024 even as costs rise – but only by 2 to 3 per cent as it focuses on the sustainability of its distributions over the long term. 

“Any sharp rise in risk-free rate from 3.5 per cent may lead to the market expecting a higher distribution yield from NetLink. NetLink’s yield spread hovering around 300-350 basis points is another key risk,” he cautioned. 

The counter was trading 1.7 per cent or S$0.015 higher at S$0.88 as at 1.22 pm on Friday.