Brokers’ take: DBS upgrades NetLink to ‘buy’ on attractive yield, lower risk-free rate

DBS Group Research upgraded its call on ​​NetLink NBN Trust : CJLU 0% from “hold” to “buy” as it now projects the stock to yield an “attractive” 6.5 per cent amid lower risk-free rate. 

The research house has raised its target price on NetLink, which owns and operates fibre network infrastructure in Singapore, from S$0.84 to S$0.98 to reflect its expectations for the trust’s distribution per unit (DPU) to rise by 2 per cent annually over the next few years.

In a report on Wednesday (Jan 11), analyst Sachin Mittal said the new target price reflects the trust’s resilient nature of distributions amid current market volatility.

In his view, high inflation should not eat into NetLink’s distributions as inflationary pressures on capital expenditure and operating expenses have been taken into consideration under the regulated asset base model.

He expects NetLink to have a higher regulatory weighted average cost of capital from January 2023 to December 2027 due to the risk-free rate being higher than 2.1 per cent, which was the risk-free rate when Netlink was first listed.

The recent shrinking of the Singapore’s government 10-year bond yield now also implies an “attractive” yield spread of 360 basis points (bps) for NetLink, compared to its last 12-month average of 290 bps, Mittal noted. 

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Mittal forecasts Singapore’s 10-year bond yield to further drop to 2.8 per cent by the end of 2023, after it dipped to 2.9 per cent from 3.5 per cent in November 2022.  “Our 3.0 per cent risk-free rate assumption is conservative,” he added.

He also expects NetLink’s yield spread to further narrow towards 250 bps to reflect its lower risk profile. In his view, NetLink may raise its distributions by only 2 to 3 per cent as the trust focuses on long-term sustainability of its distributions.

“Any sharp rise in the risk-free rate from our base-case of 3.0 per cent to 3.5 per cent coupled with NetLink’s yield spread hovering around 350 bps may lead to our bear-case valuation of S$0.77,” Mittal added.

Units of NetLink traded flat at S$0.84 as at 3.26 pm on Wednesday.