According to the statistics computed by Stocks.Cafe, Netlink NBN Trust is the most popular business trust among Stocks.Cafe users. We understand how Netlink NBN Trust operates in a monopolistic and regulated industry. Looking at the share price chart of Netlink, we can tell that it didn’t move much ever since it IPO in 2017. Since IPO it recorded negative capital return of about -5%. In general, unitholders who hold Netlink since IPO would have already had positive returns after Netlink distributed income to them twice. With such low volatility in terms of the share price movement, many choose to buy into Netlink and treat it as a 6% yield bond. I, too, am interested in getting more passive income too. Therefore, I am writing this article to understand Netlink better before investing in this.
What is Netlink NBN Trust
Netlink NBN Trust designs, builds, owns and operates the passive fibre network infrastructure such as ducts, manholes, fibre cables and Central Offices. Netlink NBN Trust is in a position where there is no other competitor for Singapore’s Next Gen NBN. Note that Netlink faces competitors by Requesting Licensees in the non-residential segments. As for residential segments, there are no other competitor installing connection points. This will provide some stability as competition for investors are always bad as seen in Singtel/M1/Starhub.
Netlink NBN Trust as of 30 September 2018 has already connected about 1.2 million residential end-user and more than 45,000 non-residential end-user. It also deploys fibre to 1,280 non-building address point (“NBAP”) connections at locations without physical address or assigned postal code, such as roadside points, bus stops, traffic lights and multi-storey car parks. NBAP applications include infrastructure for telecommunications operators (such as wireless network base stations), cameras, sensors, signage and outdoor kiosks.
Sources of Revenue
Netlink NBN Trust revenue comes from few areas. Fibre Business revenue which consists of Residential Connections, Non-Residential Connections, NBAP and Segment Fibre Connections and Installation Related Revenue constitutes about 73% of the Trust’s revenue stream. Ducts and Manholes Service Revenue constitutes about 11% while Co-Location and Other Revenue, Diversion Revenue and Central Office Revenue constitutes the remaining 16%. As Netlink NBN Trust specialises in fibre network, you can’t find fault that bulk of the revenue comes from Fibre related. What stands out for Netlink NBN Trust is that most of the revenue streams are recurring and regulated. Recurring and regulated revenues means that the cash flow from operations are predictable and thus providing stability and this is why we buy REITS or any business trust.
Why Netlink NBN Trust
In its IPO prospectus, it highlighted how Netlink has resilient business model with transparent, predictable and regulated revenue stream. It explains how the internet connection we have at home which is powered by fibre optics has become a necessity. This is very true as we are always by any problems with our internet. It also states how Netlink business is resilient even during economic downturn. I agree with this statement because firstly, we are tied down to a 1-2 years internet contract with internet service provider and since it has become a necessity, we will always renew the contract to have high internet speed. This shows that Netlink business is defensive. Pricing terms are regulated by IMDA and price will stay constant for a maximum of 5 years or a mid term review in the third year. We would definitely expect a consistent payout of dividend with pricing regulated by IMDA. Next, Netlink revenue is not affected by competition among internet service providers and that intense competition might benefit Netlink as it might lead to more fibre connections. Netlink fibre business revenue is derived in two ways – a one off installation charge for each termination point and a monthly recurring connection charge.
As mentioned above, Netlink is the only provider for Residential Fibre Network in Singapore and it posed a high barrier of entry for other competitor to compete with Netlink. The Trust Group has been building fibre infrastructure since 2009 and had invested significant amount of money to have 76000km of fibre cables, 16200km of ducts and 62000 manholes. “Roman was not built in one day” – It will be difficult for competitors to build up similar infrastructure as it requires significant capital expenditure for it to have that amount.
Remember 10 years ago or so when OpenNet sent you letter to inform you to install fibre connection? It has been 10 years and Netlink NBN Trust has already helped installed about 1 million fibre connection and subscription in our house. According to them, there are still about few thousands of us still on non-fibre. The growth for Residential connection would be to move them from non-fibre to fibre connection and to install fibre connection in new residential homes which is mandatory. It is forecasted that there will be no non-fibre subscriptions by 2021. One will worry whether will Netlink be able to distribute more distributions to us despite the fact that everyone has already transitioned to fibre?
Netlink NBN Trust can still grow its distribution with growth in Non-Residential and NBAP segments. In the non-residential segment, Netlink has a market share of 32% and the remaining shares are by Requesting Licensees such as Singtel, Starhub etc. Netlink’s growth in non-residential connection will be in SMEs where most SMEs are located outside CBD. The reason being Netlink has extensive network coverage outside and in CBD while Requesting Licensees only build their networks in CBD and large business parks. This means that Netlink will be able to use this competitive advantage to tap on the growth in SME adopting technological changes such as digitalisation and increase adoption of fibre broadband, and increasing demand for cloud-based business applications designed for enterprises. Netlink expects itself to grow its non-residential wired broadband and non-rsidential fibre broadband subscriptions to 158,230 and 58,680 in 2021 respectively. This means CAGR of 6% and 10% respectively and its market share in non-residential to rise to 37% in 2021 from 31% in 2016.
Another growth that Netlink Trust is looking at is its NBAP segment. This segment is growing thanks to the Government’s Smart Nation programme. The programme requires deployment of network of sensors and monitoring equipment across Singapore to support applications such as autonomous vehicles, high-definition surveillance cameras, parking space management and weather data collection. Netlink believes that the with the fibre network infrastructure it has, Netlink can make use of it to serve the fibre network infrastructure provider for such initiatives requiring fibre connections. The fibre connections for such initiatives require the availability of high-speed and low-latency broadband internet connections where the fibre infrastructure Netlink is the most appropriate to support such initiatives. Netlink estimates that the total market size for NBAP connections will grow to 8,171 by 2021, representing a CAGR of 75.6% from 2016 to 2021. Netlink is estimating that out of the 8,171 connections, it is predicting to capture 6,128 of them by December 2021, representing CAGR 86.2%.
It has been 10 years since Fibre is introduced, will it be obsolete going ahead? According to their prospectus, it didn’t mention whether Fibre will be obsolete in the future but it expects its network to cater to future technological developments with limited substitution risk for the foreseeable future. However, Netlink has warned prospective investors that the infrastructure may be obsolete and it might need to replace or upgrade the network infrastructure in order to remain competitive against newer products or services.
How long can fibre cables last? It is stated that the fibre cables last for 25 years but it will last longer for Netlink since it is buried underground where it is less exposed to weather and wear and tear. This means that Netlink might not need to spend more capital to upgrade or replace its infrastructure.
With 5G coming up, what is the implication as an investor investing in Netlink? Netlink has emphasised that wireless broadband connection such as 4G and future 5G is a complementary and not a substitute for fibre. This is because it cannot provide the reliability and average speeds provided by fibre. In additional, Wireless broadband services may suffer from network congestion as well as signal degradation.
I like the fact that Netlink NBN Trust is still growing in NBAP and non-residential segments. What I am worry is whether can the growth be sustainable in the long run let’s say 5-10 years down the road. Even if the pricing are regulated, will IMDA increase the price after the next review or to decrease as shown in their latest price review conducted in May 2017? I would say in the short term, Netlink NBN Trust is a great buy but I can’t see the point of holding this forever.