Broker's take: DBS downgrades NetLink to 'hold' on limited upside

DBS Group Research has downgraded fibre broadband provider NetLink NBN Trust to "hold" and raised its target price to S$1.02 from S$0.95 in light of limited upside potential.

The stock "significantly" outperformed the Straits Times Index by 25 per cent year to date, analysts Sachin Mittal and Lim Rui Wen said in a research note on Friday.

They said the Singapore government's 10-year bond yield recently dropped to an all-time low of 0.9 per cent, pushing investors to chase yield, and that NetLink's "decent 5.2 per cent yield" was higher than the 5.1 per cent average yield offered by large-cap industrial Singapore real estate investment trusts.

NetLink's yield was also "relatively attractive given (its) lower gearing and longer asset life", they added.

The analysts expect the government's 10-year bond yield to rise modestly over the next 12 months, and project that NetLink will trade at around a 5 per cent yield by March 2021.

"If interest rates continue to be low over the next two to three years (versus our base case of a modest rise), the stock might benefit from the chase for yields in the near term," the analysts said.

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However, the low cost of debt could lead to NetLink's regulatory weighted average cost of capital for its next review period (from January 2023 to December 2027) to be revised down, leading to a potential cut in future distributions.

In the longer term, the analysts said, NetLink should benefit from StarHub's accelerated fibre migration in the first half of 2020, which will have a full-year impact on its 2021 results.

The stock is also expected to benefit from a growing market share in the non-residential fibre business, serving SME (small and medium-sized enterprise) customers largely located outside the central business district and business parks. NetLink faces lower competition from other fibre network providers in this sector due to its relatively extensive nationwide network coverage.

NetLink's low gearing also gives it ample headroom for opportunistic investments in Singapore's Smart Nation initiatives, the analysts said.

These initiatives - which include the deployment of a network of sensors and monitoring equipment across Singapore to support the use of autonomous vehicles and high-definition surveillance cameras - are expected to drive demand for fibre connections and could lead to a healthy growth in distributions for the broadband provider, they added.

Shares of NetLink NBN Trust were trading at S$0.99 during the midday break, down S$0.01 or 1 per cent.