NetLink NBN Trust Biggest Risk

On 10 July 2017, NetLink NBN Trust registered its final prospectus with Monetary Authority of Singapore, paving the way for the biggest IPO of the year. The offering price is $0.81. Initially, the offering price was estimated by analysts to be between $0.81 and $0.93. The low-end of the offering price could be indication of weak demand from the big boys.

With net asset of $3.07 billion and total units of 3.02 billion, the Net Asset Value (NAV) is about $1.01. Given that the offering price is only $0.81, NetLink NBN Trust IPO is considered surprisingly under-valued. It should be noted that the majority of the assets is the network infrastructure, which are recognised initially at their fair value at the date of acquisition and then depreciated over their remaining useful lives. The estimated remaining useful life for the purposes of calculating depreciation for NLT’s network assets is between 25 and 50 years, depending on the type of assets.

As cited by several local investment bloggers. there are a few risks that investors need to note for NetLink NBN Trust.

NetLink NBN Trust

First, a few bloggers had mentioned that although NetLink NBN Trust has a monopoly in the residential fibre network, it is tightly regulated by IMDA. Hence, its ability to set price is curtailed by the regulators. But I don’t see this as a major concern because Singapore government is known to be business-friendly and it will not be in the government’s interest if NetLink Trust is making annual losses.

In any case, the Trust’s distribution is based on cash flows available for distribution and not on whether the Trust makes an accounting profit or loss. This type of structure is different from a typical listed company which issues dividends to shareholders based on annual profits or losses. In fact, NetLink is highly cash generative as the net cash from operating activities was $196 million for the year ended 31 March 2017. Previous year was $133 million.

Investors may point out that although NetLink has cornered the fibre network for the residential market, it may face competition in the non-residential segment. This is because retail service providers can choose to set up their own fibre networks in industrial parks and Central Business District (CBD).

For areas where the Requesting Licensees have their own fibre networks, demand for use of the Trust Group’s network is likely to be lower. However, I don’t see this as a risk because NetLink NBN Trust is currently also leading in this segment with a market share of 32% of the estimated 121,3004 corporate wired broadband connections.

Furthermore, NetLink NBN Trust’s network is [This is a premium article. The rest of the content is blocked and can be accessible by SG Wealth Builder Members only. To read the full content, please sign up as member.]

Read my other articles on NetLink NBN Trust:

  1. Three things about NetLink Trust
  2. Singtel’s NetLink Trust IPO application approved
  3. Singtel’s shares to rocket on NetLink Trust IPO?
  4. Can Singtel fight gravity?
  5. Singtel at a cross-road
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Updated: March 27, 2019 — 6:09 am

4 Comments

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  1. while accounting profit&loss isn’t ‘real’ in income statement, hard cash flow is the king, still i cannot comprehend a few bloggers’ opinions on the similar statement here “In any case, the Trust’s distribution is based on cash flows available for distribution and not on whether the Trust makes an accounting profit or loss. This type of structure is different from a typical listed company which issues dividends to shareholders based on annual profits or losses. ”

    in fact, i don’t understand this part, whether trust or company, is just a form of holding structure, governed by different acts/regulations, but the underlying biz is the same for NLT, that is a operating CF generating biz w/ an enormous infrastructure outlay(read depreciation here), what is the true return of such biz? if every time we just talk about EBITDA, but not real cash return, then something is missing.

    on the other hand, singtel choose to float it only after these many years, is an indication that is the best time to milk it. chinese idiom: “sellers are aways smarter than buyers.” (买的没有卖的精)

    where is the growth story? leave us only a dividend play, whether 5% is maintainable and good enough, every player has one’s own take.

  2. Hi Bruce,

    Thank you for your comments. You are right to point out that NetLink Trust’s asset depreciation is huge – minimum of $100 million for the past few years. Probably due to this, Singtel is cashing out now and plotting to reinvest the cash.
    After reviewing the prospectus, I don’t think I would be participating in the IPO. There are other more interesting counters to grow my wealth.

    Regards,
    Gerald
    https://www.sgwealthbuilder.com

  3. Excellent analysis. Obviously this divestment does a lot of good things for Singtel’s balance sheet. Imho, the ‘kicker’ is the possible technology disruption to the business. That risk just got unloaded onto the investing public. Instinctively I don’t have good vibes about a business if the owner (Singtel) is pricing the business less than its ‘fair value’ and then proceeds to sell shares to the public. Throw in the DPU lure and the trap is set. It’s a telling sign about the owner’s future view of the prospects for the business. I’m sure Singtel already knows what’s around the corner in terms of disruptive technology.

  4. Hi Justin,

    Thank you for your comments. I share your sentiments after reading the prospectus.
    I think SingTel could be aware of the next generation technology for network connection.
    Lets be vigilant against the big boys.

    Regards,
    Gerald
    https://www.sgwealthbuilder.com

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