Brokers’ take: CGS-CIMB lowers TP on NetLink Trust amid higher interest rates

CGS-CIMB on Tuesday (Aug 16) lowered its target price on NetLink NBN Trust to S$1.04 from S$1.10 prior, while reiterating its “add” call on the stock.

Analyst Ong Khang Chuen maintained his earnings forecasts for NetLink, but factored in the rising interest rate environment in lowering the target. He nevertheless believes that the company is a “defensive play amid the current backdrop of rising inflation and a potential economic slowdown, given its strong earnings visibility and stability”. NetLink’s Q1 FY2023 net profit of S$27.6 million, up 11.3 per cent, was in line with CGS-CIMB’s expectations. Its topline grew 4.8 per cent to S$97.9 million, driven by higher ancillary project revenue and connections revenue.  Construction activities provided a further boost, with ancillary project revenue surging 136 per cent to S$4.4 million. This was the key driver for NetLink’s Q1 revenue growth, Ong noted.  The trust also saw healthy growth across all fibre connection segments. The fastest growth was recorded in non-building address point (NBAP) and segment connections, as NetLink supplemented local telcos’ rollout of 5G infrastructure and projects that required a higher level of network resiliency, Ong highlighted. He sees NetLink’s balance sheet remaining “robust”, with good debt headroom for inorganic growth opportunities. Net gearing stood at 20.8 per cent as of end June.

“NetLink continues to explore opportunities to invest in telecoms infrastructure businesses overseas that are likely to generate stable cashflows,” said Ong.

He noted that potential re-rating catalysts include earnings-accretive acquisitions and stronger-than-expected growth in NBAP connections as NetLink benefits from telcos’ 5G rollout. Downside risks include lower-than-expected interconnection offer pricing in the upcoming review.

As at 11.40 am, NetLink was trading at S$0.94, down 0.5 per cent or S$0.005.