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Broker's take: Phillip Capital initiates coverage on Netlink NBN Trust with 'accumulate'

PHILLIP Capital initiated coverage on Netlink NBN Trust (NLT) on Wednesday with an "accumulate" call and target price of S$0.89, noting that its resilient business model based on recurring subscription fees ensures limited volatility in sales and cost base.

Research analyst Alvin Chia also noted NLT's position as the only network provider of residential fibre broadband in Singapore.

As at 10.46am on Wednesday, units of NLT were trading at S$0.83, up 0.5 Singapore cent or 0.61 per cent.

"The asset base of more than S$3 billion and the duration needed to build a comparable network across Singapore will pose a major barrier to entry," wrote Mr Chia. "Any meaningful return on investment would be a challenge without the similar financial assistance of the Singapore government."

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NLT received an aggregate grant worth S$732 million under the Intelligent Nation 2015 (iN2015) masterplan.

Phillip Capital expects NLT's residential segment to grow in the long term with new homes being built, population growth and more households installing dual fibre connections. The segment contributes 58 per cent of NLT's revenue.

The brokerage predicts that government smart nation initiatives will propel growth in the trust's Non-Building Address Point (NBAP), projecting a 41 per cent year-on-year growth rate in FY2020. These NBAP connections are used in applications such as wireless network base stations, cameras and sensors, which will be in demand with the progressive rollout of smart nation programmes.

In NLT's non-residential segment, demand is expected to come from small and medium-sized enterprises upgrading to fibre for cloud-based applications. However, retail service providers with their own fibre infrastructure will compete directly with NLT, leading Phillip Capital to project more conservative estimates of 5.3 per cent year-on-year growth for the segment in FY2020.

Risks include revenue volatility in its non-residential, installation-related and diversion revenue, which is generated when third parties such as developers and the Land Transport Authority request NLT's ducts, manholes and fibre cables to be diverted for events such as road works and other construction projects. These revenues contribute only about 13 per cent of total revenue.

NLT will also review its weighted average cost of capital (WACC) of 7 per cent in 2022, and any downward revision will impact its regulatory pricing.

"In our opinion, the current rising interest rate environment will offset any downward pressure on WACC," Mr Chia said.

Other risks include potential losses of revenue or fines if NLT fails to meet quality of service standards, as well as unforeseen spikes in capital expenditure.