So, What's Going On With NetLink Trust?


This is gonna be a LONG one, ladies and gentlemen – subscriptions for the Netlink Trust IPO are opening next week. As it stands, Singtel stands to reap a potential $2+ billion SGD windfall from divestment of 75% of their Netlink Trust holdings. Now, the lowdown - Netlink Trust currently owns and maintains a fibre network that supports roughly 1.1 million residences in Singapore, with installation points deployed in another 200,000 more residences (representing more than 80% of residential homes in Singapore). The Trust also maintains has 38,500 non-residential connections.  This network was developed with fiscal assistance from the Singapore government in accordance with the Intelligent Nation 2015 Masterplan (iN2015), which is a 10-year master plan to transform Singapore into a Smart Nation Hub by improving infocomm infrastructure.



I’ve always tried to gear my portfolio towards the Smart Nation idea, and I admit I’m glad to see this IPO. But the question is – is it worth it? As the first Trust of its kind in Singapore, there are no precedents to compare it to, so this is somewhat unchartered territory.

[REVENUE]

So I’m taking a closer look at this. In terms of revenue, the Trust’s revenue stream is pretty streamlined and regulated. Pricing is regulated by the Infocomm Media Development Authority of Singapore (IMDA). The bulk of their revenue is generated from monthly fees for residential and non-residential connections, along with one-time installation charges for installing termination points. As of 31 March 2017, this revenue accounted for 75.1% of the Trust’s total revenue.

The Trust’s primary clients are actually companies that provide fibre services to residential and non-residential users. As such, their customer base includes Singtel, Starhub, M1, ViewQwest, and MyRepublic. As of 31 March 2017, 10% of the Trust’s revenue was generated from deals made with these clients regarding rental of manhole and duct space, where their clients are allowed to utilize space owned by the Trust for a fee. As mentioned in the prospectus, the Trust has an arrangement with Singtel, where Singtel will acquire a certain amount of manhole and duct services from the Trust. This agreement has an initial year-term of 25 years, and is set to commence in 2021.

The Trust has experienced steady financial growth over the last 3 years. At a glance, financials are decent – total revenue grew from S$217 million in 2015 to S$258 million in 2016 (19% growth), finally stopping at S$300 million in 2017 (16% growth). This was due to increased demand for fibre services, with the bulk of the revenue generated from residential connections. Installation-related revenue rose in 2016, but dipped the following year, which is understandable – as the network is deployed throughout Singapore, there are only so-many ‘one-time installation charges’ that can be charged. This segment will not die – as new homes, BTOs, condominiums, and office buildings spring up, the Trust will continue to have business here, but stagnation in this particular segment is to be expected.

REVENUE CHART - Source: NetLink Prospectus


[NET PROFIT & CASH FLOW]

Accordingly, while operation expenses and installation costs have risen, net profit has risen alongside them. The Trust’s net profit in 2017 was S$75 million, more than double the previous year’s S$36 million. The Trust actually made a loss of S$15 million in 2015, due to massive operation expenses from the integration of OpenNet with Netlink, but they recovered in the following years. Cash flow has been positive for the past 3 years.

EXPENSES CHART - Source: NetLink Prospectus

[DEBT]

The Trust’s debt portfolio has remained at S$1.6 billion throughout the last 3 years. The Trust entered an ST Facility Agreement with Singtel in 2011 for a loan of S$1.325 billion, which was increased to S$1.605 billion in 2014. These loans were used to acquire infrastructure assets from Singtel. Annual interest rates at that point in time were 2.39%, amended to 2.51% after November 2014. In 2016, the Trust borrowed S$510 million from banks to pay off the equivalent amount in their original Agreement. This bank loan was a term loan with an effective interest rate of 1.97% in 2017. As per the prospectus, the proceeds from the IPO will be used to settle the remaining S$1.1 billion from the ST Facility Agreement, with the remaining S$477,000 to be settled with operating cash flow. This leaves the bank loan unsettled. As of June 2017, the Trust has borrowed an additional S$210 million from the banks for capital expenditure. These bank loans (with variable interest rates) expose Netlink to interest rate risk, and the management has responded by entering a series of fixed-for-revolving interest-rate swaps until 2021. According to management, 100% of their bank loans have been hedged, and the all-in blended fixed-rate is 2.91% per annum. This segment bears looking into.








LOANS & DEBT - Source: NetLink Prospectus

[TO THE FUTURE]

Earnings per unit (EPU) for 2016 and 2017 respectively were 1.04 and 2.06 cents. The Trust hopes to produce yields of 4.73% - 5.50% in 2018. EPU is forecasted to be 1.14 and 1.70 in 2018 and 2019 respectively. As it currently stands, with a 2017 EPU of 2.06 cents, and with an initial offer price of S$0.81, P/E is expected to be 39.32, which is REALLY high as compared to other Trusts. Netlink has a lot of hype surrounding it, but this leads to question as to whether or not this is overvalued.

As of 31 March 2017, monthly subscription prices for residential connections were S$15. Monthly non-residential charges were S$50. These prices were reviewed and revised in May 2017; the new prices are expected to come into effect on 1st January 2018. The price for residential connections is expected to be revised to S$13.80 by the regulator. This represents an 8% decrease in price. Non-residential connections have charges bumped up to S$55. Forecasted revenue for 2018 is expected to fall before recovering in 2019. Accordingly, net profit is expected to fall in 2018, to S$44 million (a drop of 41%). Residential and non-residential fibre subscriptions are expected to grow towards 2021 at a CAGR of 6.5%, with residential connections spurred on by continued migration from old tech to fibre, and with non-residential connections bolstered by SME requests for connectivity.


MPA SUBSCRIPTION PROJECTIONS - Source: NetLink Prospectus

The heavily-regulated structure of the Trust does not allow Management to alter prices as they see fit. Any changes in price has to be approved by the IMDA. I would wish that the Management diversifies the business. While fibre-connectivity is a forward-looking business, the Trust could benefit from diversification and synergy.

Additionally, the Trust has included a disclaimer that they may not be able to pay dividends to unitholders. Note that this is classified as a Business Trust, and not a REIT. REITS are required to pay out 90% of their taxable income.

The Public Offer opens on 10 July, at 5pm.

The Public Offer closes on 17 July, at noon.



Until next time.

Creed


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