Netlink Trust IPO
This week saw the launch of the biggest IPO in Singapore in the last few years, which is the divestment of Netlink Trust by Singtel. I decided to ballot for a small position to get exposure to the stable dividend yields it could provide. Considering my limited cash reserves and some reservations I have about the stock, I chose to take a more cautious approach.
The Business
Netlink Trust builds and maintains the fibre network infrastructure in Singapore. It provides services to licensees who then offer these services to retail service providers, Netlink Trust then gets a one-off installation fee and recurring maintenance fees.
There are 3 categories of fibre networks which contribute to their income stream. Home networks (which Netlink has a monopoly), non-residential networks (where it competes with the Telcos, currently holding around 32% of the market share), and NBAP (non-building access points).
This business looks stable. Fibre broadband is now the common standard of internet access which the new generation cannot live without. Homes which have it installed are highly unlikely to downgrade it. Thus, Netlink Trust has a constant revenue stream. The high barriers to entry in creating a new network should also contributes to its stability. Also, Netlink is unaffected by the competition between the different service providers, as the only one who provides the fibre services for them.
As it deals with the licensees rather than end users, Netlink does not need to incur marketing costs, keeping operating expenses low. The licensees, being large telcos, are also reliable in making payments, giving a lower credit risk.
While Netlink Trust will be competing with the telcos for non-residential network business, it has an advantage in having a nationwide network to allow it to serve more areas, while the telcos are concentrated in the CBD area.
As we move into a becoming a SMART Nation, and the future economy, the NBAP sector could also be one of potential growth and can contribute to revenue.
Numbers
Most attractively, Netlink is expected to pay out dividends of 5.43% of issue price in 2018 and 5.73% in 2019, giving it a very good yield similar to reits.
As it uses a trust structure, it will be declaring dividends based on cash flows rather than profits (otherwise depreciation will reduce the dividends available), and cash flows can be expected to be stable based on its business model. However, unlike a REIT, there is no mandatory requirement to pay out dividends, and this yield may be at risk, though for now they have a dividend policy of 90% of distributable income / 100% of cash available for distribution (operating cash flow - debt and capex).
Revenue looks to be growing each year. It was $217m, S$257m and $299m for 2015 - 2017, and forecasted to be $221m in 2018 (8 month period), and $341m in 2019.
Profit is $40m and $79m for 2016 and 2017, and forecasted at $44m and $66m for 2018 and 2019. Based on the EPS of 2.06c, the P/E ratio is 39 times, which is fairly high, though a monopolistic business would also command a better P/E ratio. I read that profit is not so relevant for their business structure since distributions are based on cash (e.g. Singapore IPOs).
Instead, I should look at the EBITDA. EBITDA is a more accurate measure of performance as this business has high depreciation. EBITDA was $183m and $220m in 2016 and 2017, and forecasted to be $153m and $240m for 2018 (8 months) and 2019.
Using Enterprise Value over EBITDA as a metric also helps to evaluate the cash flows (see here). Enterprise value (based on blogs I read rather than my own calculations) is around $3600m, and EBITDA for FY2018 is around $200-240m. This gives a multiple of 15-18x which is quite expensive. Singtel trades at 12x EV/EBITDA. This may be fair since this is a stable dividend asset and is still a better metric than most REITS.
"Enterprise Value ("EV") = market value of common stock + market value of preferred equity + market value of debt + minority interest - cash and investments."
Cash flow from operations is $92m in 2015, $101m in 2016, $164m in 2017. Forecasted at $132m and $195m in 2018-2019. Cash flow also seems to be growing, but this needs to be deducted against capex . Maintenance capex is estimated at 40-60m (see here)
It is expected that the CAGR of residential subscriptions will be 6.5% and all residences in Singapore will be connected to the fiber network by 2021.
The IPO is also below NAV (PB 0.92x), but as pointed out here, these assets are unlikely to be very liquid, so I should not put too much weight on the discount to NAV.
The manager's annual fee is $900,000 a year, which seems quite reasonable in comparison to the trust's revenue.
Concerns
Only one technology.
Netlink Trust's business revolves around one main piece of technology, the fibre network. If a new technology is developed suddenly to replace this, then the entire business may quickly become obsolete. Granted, such technological changes do not get developed so often and need time to be set up (we have not even finished getting every house in Singapore onto the fibre network). Once there is wind of such news, the price is likely to drop heavily and whatever dividends accumulated over time may not be enough to mitigate the loss. I will have to keep an eye on the latest tech news and developments to make sure I exit this investment at the right time.
Revenue Streams
At this point, there are already 89.2% residential homes who are connected to the fibre network, so there seems to be limited space to grow revenue from this sector. By 2021, all residences will be linked up to the fibre network, and revenue from new installations are likely to drop. Non-residential networks also face competition from the major telcos. This leaves the NBAP sector. This is a promising sector which may see a huge boom with the SMART Nation initiative and the rise of the "Internet of Things". The prospectus also predicts a CAGR of 86.2% in the number of NBAP connections. However, there are only 357 connections as at March 2017 and only contribute 0.2% of Revenue. While I am also buying into this stock to have an exposure to this new initiative, it may be likely that the growth of NBAP is far less than expected and adds little to revenue.
Limited business scope
Netlink Trust is also regulated by IMDA, which has the discretion to revise the prices of its services. Netlink's revenue is thus not even in its own hands to control. Separately, Netlink does not deal directly with its end-users and is reliant on its licensees for marketing. Also, the proceeds are mostly used to repay debts or to pay Singtel for the assets. All this give me the feel that I am not investing in an asset with growth value, merely sharing in the dividends of an existing utilities service, causing me to take a more cautious approach.
Conclusion/Strategy
This investment looks to have stable and good yields and is thus worth putting in some money. However, as I have some reservations about the growth prospects of the business, and also, since Netlink has limited buyout value except via nationalization (Singtel was forced to divest this, so it is highly unlikely any party will be able or want to take up a significant stake), this will be an investment I watch closely. If there are any signs of threat to the business, or if the price rises/falls heavily, I will want to get out of this quickly too. Especially in the event of a price drop, the business model does not look like it has much options to make a turnaround.
Acknowledgement
I of course have much to learn in the world of finance, and so, in doing my analysis , I referred to, inter alia, the following financial blogs to tap on their experience and diligence in analysing this investment:
All mistakes are of course my own.
Disclaimer
The above is merely a record of my own thoughts and reading for reference and is not intended to constitute any advice or recommendations to any person.