Netlink NBN Trust’s (SGX: CJLU) recent IPO has given rise to a new investment opportunity for Singaporean investors.
According to Deutsche Bank, Netlink Trust’s unique monopoly position and resilient business model present a unique defensive yield play for investors.
Moreover, with the government’s push for the Smart Nation project, Netlink Trust is likely to experience its next phase of long-term growth.
1. Netlink Trust’s monopoly on fibre network business
Netlink Trust has a unique monopoly position in the residential fibre network business in Singapore. Netlink Trust’s extensive Next Gen Nationwide Broadband Network (NBN) provides nationwide coverage to residential homes and non-residential premises around the whole of Singapore.
Nowadays, connectivity to the internet is no longer just a commodity, but a need. Apart from oxygen, water and food, internet connectivity is probably the next most important thing in our everyday lives.
But it is not just enough to be connected to the internet. End users want to internet connectivity that is as fast as possible, which can only be offered by the fibre optics network.
However, before being able to be connected to the fibre optics network, each residential premise has to be first connected to the ultra-high-speed fibre network infrastructure. The only ultra-high-speed fibre network infrastructure is designed, built and owned by Netlink Trust.
2. Resilient and highly ‘visible’ business model
As the sole provider in the residential fibre network market, Netlink Trust is sitting on a business with high visibility and resilience. Its Regulated Asset Base pricing segment constitutes to ~81% of Netlink Trust’s revenue base.
This pricing model gives Netlink Trust a guaranteed 7.0% post-tax return on capital employed, leading to high predictability on a large part of Netlink Trust’s revenue stream.
Moreover, every five years, the regulated pricing is reviewed by the IMDA (Netlink Trust’s main regulator) to see if there is a need to raise the pricing to maintain the 7.0% post-tax return on capital employed.
Given the high barriers to entry and highly regulated nature of the business, it is hard to imagine Netlink Trust being challenged by external competition.
3. Next phase of growth: Smart Nation initiative
The next phase of growth for Netlink Trust will be driven by Singapore government’s smart nation initiative.
Encouraging SMEs to digitise and raise productivity
Part of the smart nation initiative involves encouraging SMEs to improve productivity via digitisation, fibre broadband uptake and cloud-based business applications.
The migration of SMEs from their current network to adopt the new ultra-high-speed fibre network infrastructure will create a larger base of recurring revenue for Netlink Trust.
Internet Of Things project by various government agencies
Another area of growth is the rise in the use of Internet of Things (IoT) to transform the lives of Singaporeans.
Potential applications include “sensor technology and monitoring equipment, particularly in the area of autonomous vehicles, high definition surveillance cameras, parking space management and weather data collection”.
These applications are part of the initiatives that have been proposed by various government agencies.
Non-Building Address Points (NBAP) connections need to be installed to locations with no physical address to support the IoT project. That includes places like roadside points, bus stops, multi-storey car parks and traffic lights.
An extensive and stable network infrastructure is required to provide NBAP connections to these locations with no physical address, which can only be fulfilled by a company that has a wide network reach. Netlink Trust fits the bill.
Thus, Netlink Trust is likely to be the main beneficiary of Singapore’s smart nation initiative.
Deutsche Bank Research initiated coverage on Netlink NBN Trust (SGX: CJLU) with a BUY rating and a target price of $0.95.