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Broker's take: CGS-CIMB calls NetLink defensive yield play, initiates coverage with 'add'

CGS-CIMB has initiated coverage on NetLink NBN Trust with "add" and a target price of S$1.10, viewing the fibre-optic cable owner as a defensive yield play amid market volatility, given its high barriers to entry, strong earnings visibility and stability.

Units of NetLink were trading up 0.5 Singapore cent or 0.5 per cent at 97 cents as at 1.13pm on Thursday.

CGS-CIMB analyst Ong Khang Chuen said in the current low-interest-rate environment, the trust offers an attractive dividend yield of about 5.4 per cent based on CGS-CIMB's fiscal 2021 forecast. He also sees a potential total return of 19 per cent.

"We believe NetLink's business is resilient to economic and business cycles, given the utility-like nature of broadband," he said.

NetLink is the sole network provider of residential fibre broadband in Singapore, with over 1.43 million residential connections or a 94 per cent penetration rate as at end-June 2020. 

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CGS-CIMB sees a lower risk of dividend cuts for NetLink versus real estate investment trusts (Reits), which are expecting weaker occupancy rates and rental reversions due to the Covid-19 impact.

For Maybank Kim Eng analyst Kareen Chan, certain Reits may also exhibit higher distribution per unit downside from capital preservation on weaker outlook. Hence, NetLink's less volatile business offers a better yield play over said Reits and telcos which are seeing a decline in average revenue per user.

As a "shelter to wait out the storm", the trust is also a good option for investors to switch from banks for relatively higher dividend sustainability, seeing its strong cash flow is backed by fixed regulatory pricing till end-2022, she said.

Maybank Kim Eng reiterated its "buy" call on NetLink with an unchanged target price of S$1.07 in a separate research note dated Tuesday.

The Monetary Authority of Singapore's move to call on banks to cap their FY2020 estimate dividend yields may cause lenders' average dividend yield for the fiscal year to fall to 4 per cent, Ms Chan added.

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