[Company Review] NetLink NBN Trust

In my first company review, I'll be covering NetLink NBN Trust (SGX:CJLU). For this and subsequent company reviews, I plan to break down the post into four segments: Overview, Business ModelPerformance Trends, and finally Drivers & Risks. I'll wrap up the post with some personal parting thoughts as well. If you have any feedback regarding this, feel free to let me know, nothing's set in stone!


NetLink NBN Trust (NLT) focuses on passive fibre network infrastructure, with all operations in Singapore. Her expertise span across the entire spectrum of operation, from design to installation to operation. Listed in 2017, she has a relatively short history as a publicly traded counter, but what she lack in actual track record, is made up with a simple, regulated business model. 

Do note that NLT operates as a business trust, not a REIT. This is important as this exempts NLT from many of the regulations set by MAS, such as the 50% gearing ratio cap and the 90% minimum payout ratio. While this provides additional financial autonomy to NLT, it also means that potential investors need to look more closely at her financial health before making any decisions.

Business Model

a) Revenue Segments

NLT generates revenue mainly from residential connections, where they install, activate and subsequently charge monthly fees for fibre connectivity per household. Being the only service provider with nationwide coverage, they enjoy monopoly-like status in the residential connections segment, and will be providing installation and maintenance services for all new housing estates (eg. Punggol) for the foreseeable future.

source: NLT Annual Report 2020

Apart from handling residential connections, NLT also provides services for non-residential buildings, for commercial or other parties. Unlike residential users, commercial end-users can choose to install their own fibre network, hence making this non-residential connections segment more competitive.

NBAP stands for Non-Building Access Points, such as surveillance cameras which require a consistent connection to transmit video streams to control centers. 

Installation-related revenue are non-recurring revenue that stem from the fees charged for the installation process itself.

Diversion revenue refers to compensation paid to NLT for cases where her infrastructure/cables need to be diverted to make way for other construction works to proceed (eg. road works).

The final three segments (Co-location, Ducts and manholes and Central Office) generally involve revenue received from leasing out the above mentioned space and infrastructure to other parties (eg. Singtel).

b) Revenue Characteristics

For the above revenue segments, only Installation and Diversion revenue streams are predominantly one-off, with the rest being "recurring" in nature for the most part.

source: NLT Annual Report 2020

Based off 2020 Annual Report data, this makes 90% of the revenue "recurring" or recognized over time.

NLT's business is highly regulated by IMDA. Highlighted are two aspects which investors should definitely be aware about:

1. Quality-of-service standards

NLT has to meet service standards set by IMDA, with potential financial penalties imposed if standards are not met. For the period July 2018 to June 2019, a penalty of $10,000 was imposed, down a significant amount compared to $70,000 for the year before.

2. Pricing

Most (roughly 80%) of NLT's revenue depends on pricing set by IMDA, based on Weighted Average Cost of Capital (WACC) currently set at 7%. In simple terms, this basically means that the "profit margin" is determined by IMDA. This number will be reviewed every 5 years, with the option to review on the 3rd year if there are major changes in the operating environment. The next review will be in 2022.

Performance Trends

All main segments reported increases in total connections, with Residential, Non-residential and NBAP seeing a 7.5, 3.2 and 5.5% growth in connections year-on-year respectively.

Note: while residential component growth is largely out of NLT's control, there should still be steady growth in the near future: 

  • projected ~20,000 new housing units per year
  • 94% penetration, ~90,000 existing units yet to convert
  • second fibre connection for some end-users

Net profit after tax increased from $77.4 million to $78.1 million year-on-year, for the most recent fiscal year, representing an increase of 1%.

Interest Coverage Ratio remained steady at 13.4 times, compared to 13.5 times the year before.

Drivers & Risks

Key things to look forward to for NLT investors include:

1. SmartNation, IoT 

With the ongoing SmartNation drive, there will be more and more demand for smarter city infrastructure, which will usually depend on a robust connection backbone for connectivity to Internet-of-Things (IoT) devices. This will provide a key and sustainable driver for the NBAP segment, as more and more use cases are found.

For a recent example, see the unmanned police beacon on trial at Punggol Waterway Park Connector here.

2. Riding the 5G wave

Many companies will switch to using 5G, either to improve on existing processes or to develop and explore new business use cases. This would in turn support growth in the Non-residential segment as 5G speeds require an equally capable fibre backbone to support fast connections speeds end to end.

Not everything is rosy for NLT. Here are the key risks that investors should consider:

1. WACC Review

IMDA may choose to update the WACC down from 7% in 2022, which would heavily impact NLT's profitability. This is a key uncertainty that is out of NLT's control. Most analysts predict a drop in WACC due the lower interest rate environment. Judging from the previous review, we will probably get an announcement regarding this 7-8 months before the next 5 year cycle starts in 2023, so do expect some minor price volatility as we approach June 2022.

2. Service standards penalty

Depending on the service standards set by IMDA, NLT may incur heavier penalties in the upcoming years. This is partially in NLT's control though, and they seem to be putting in good effort to continuously improve their processes.

Thank you for taking the time to read this first company review! Personally, I have a mixed feeling for this counter. On one hand, the near term (1-2 years) outlook is very stable, and the macro trends seem to support the long term prospects. The key risk that I am concerned about is the IMDA review. 

This is really subjective, but I think that the slight yield premium that NLT (roughly 5.2%) has over "Tier 1-2" stable REITs (roughly 3.5 to 4.5%) is fair, as apart from the IMDA review uncertainty, this is a really solid dividend counter. Do share your thoughts and perspective on this!



Author's note:

At the point of writing, I am a shareholder of NetLink NBN Trust. I have put in my best effort to ensure that the facts are accurate, but I do not guarantee it. Opinions are my own and do not constitute any recommendations.