Broker's take: Maybank KE says NetLink a 'buy' as yields more stable than telcos, Reits

MAYBANK Kim Eng on Monday reinitiated coverage of NetLink NBN Trust with a "buy" call and target price of S$1.08, citing its "less volatile" business compared to other yield plays such as telcos and real estate investment trusts (Reits), which are facing greater competition and risk dividend per unit (DPU) cuts.

NetLink shares were trading at 97 Singapore cents as at 10.30am, up 0.5 cent or 0.5 per cent.

Analyst Kareen Chan estimated NetLink's FY21 DPU yield to be 5.2 per cent, which is comparable to her estimates of Singapore Reits' FY20 (end-December) average yield of 5.6 per cent, and telco players' yields of 5.5 per cent.

"We favour NetLink over telcos and certain Reits that exhibit higher risk of DPU downside from capital preservation amid Covid-19 outbreak, weak fundamentals, and telcos' declining average revenue per user and equipment sales due to supply disruption," she wrote.

Ms Chan said NetLink is "a domestic-yield play amid Covid-19 reopening uncertainties" and boasts an "underground shelter to dividend downside".

She pointed out that NetLink is the sole nationwide provider of passive fibre network infrastructure in Singapore. Recurring cash flow represented 92 per cent of the company's FY20 revenue, with residential connections accounting for 62.5 per cent.

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This residential segment will provide earnings stability for the company, driven by Singapore's high residential broadband penetration rate of 94 per cent, and an annual new household formation of 25,000 units through 2029, she added.

Meanwhile, NetLink's non-residential segment will be driven by office decentralisation and data centre growth.

Ms Chan said she expects Netlink's non-fibre segments - which accounted for 18.5 per cent of FY20 revenue - to remain stable due to long-term contracts.

In addition, its non-building address points segment could also grow as the company will continue to play a role in nationwide 5G deployment, she added.

Successful 5G rollout requires base stations to be linked with existing fibre infrastructure, and Ms Chan expects the two incumbents (Singtel, and a M1-StarHub joint venture) to tap NetLink's fibre infrastructure, instead of building their own, to reduce capital expenditure.

5G network coverage provided by the incumbents is currently concentrated in the central business district and in business park areas, she added.