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SingTel shares to rocket on NetLink Trust IPO?

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When Kimly Group, a local coffee shop chain, was listed in Catalist a couple of months ago, it generated much interests among investors and local finance bloggers. With a market capitalization of only $288 million, Kimly Group does not fall in the league of the big boy category nor the blockbuster type of listing that SGX mainboard should be gunning. In this regard, all eyes must be on the mouth-watering NetLink Trust IPO.

To put things into perspective, if SGX’s strategy was to sell itself as “Asian Gateway”, then it must seriously start to attract billion dollar listings. Aircraft lessor, BOC Aviation, which is based in Singapore and used to be owned by Singapore Airlines, has previously given SGX the snub. The lessor chose to list in Hong Kong instead. It was a massive blow for SGX as the company is estimated to be worth a whopping $6 billion.

Then again, with a slew of privatisations taking place, SGX management has more pressing issues to settle than attracting billion dollar listings. Among the many delisted companies, homegrown OSIM applies for listing in Hong Kong as V3 just months after exit from Singapore stock market. This shock move should be a wake-up call for SGX that something drastic should be done to stem the decline.

Stock investing

NetLink Trust will certainly fit the profile of listing that SGX should be aiming for. NetLink Trust is an associate of SingTel which announced in February that it is hiring three banks to advise on the impending NetLink Trust IPO. The move is due to the April 2018 deadline set by Singapore authority which requires SingTel to divest its stake in NetLink to below 25 percent. During the briefing, CEO Ms Chua Sock Koong did not reveal the size of the proposed offering. However, analysts estimated the value of NetLink Trust to be around $4.5 billion.

Previously, I have written several blog posts to analyse SingTel. Would strongly encourage readers to take a look:

  1. SingTel’s investment moats
  2. Is it worth investing in SingTel now?
  3. Investing in SingTel

NetLink Trust designs, builds, owns and operates the fibre network infrastructure which is the foundation of Singapore’s Next Generation Nationwide Broadband Network (Next Gen NBN). The company is deemed fast growing as it contributed $32 million post tax profits to SingTel in the last quarter financial results, an increase of 42% compared to last year.

Although currently 100% owned by Singtel, NetLink Trust is managed and operated by CityNet Infrastructure Management Pte. Ltd. in its capacity as trustee-manager. Singtel does not have effective control in NetLink Trust, and hence it is equity accounted as an associate at the Group.

In July 2011, Singtel established a business trust, NetLink Trust, as part of the IDA’s effective open access requirements under Singapore’s Next Generation Nationwide Broadband Network. In September 2011, Singtel sold certain infrastructure assets, namely ducts and manholes used by OpenNet Pte. Ltd., and 7 exchange buildings (“Assets”), and Singtel’s business of providing duct and manhole services in relation to the Assets (“Business”) to NetLink Trust, for an aggregate consideration of approximately S$1.89 billion. Singtel also completed its subscription for a further 567,380,000 units at S$1 each in NetLink Trust.

The aggregate consideration paid by NetLink Trust for the purchase of the Assets and Business was financed by the issue of units to Singtel of S$567.4 million and loan from Singtel of S$1.33 billion.

At the consolidated level, the gain on disposal of Assets and Business recorded by Singtel was deferred in the Group’s statement of financial position and is being amortised over the useful lives of the Assets. The unamortised deferred gain in the Group’s statement of financial position will be released to the Group’s income statement when NetLink Trust is partially or fully sold, based on the proportionate equity interest disposed

For the quarter ended 31 December 2016, NetLink Trust’s operating revenue and EBITDA rose 12% and 11% respectively, driven by growth in residential fibre end-users. As at 30 November 2016, fibre broadband penetration rate in Singapore was 79%. As Singapore aspires to be a Smart Nation, demand for fibre broadband has been rising. To date, NetLink Trust has fulfilled over 320,000 fibre connection requests in 2015 and has wired up over 1.2 million homes in Singapore.

NetLink Trust IPO could be a windfall for SingTel investors. The management of SingTel may choose to issue special dividend or use the IPO proceeds to pay off its mounting debt. Either way, it is good news for investors but I am inclined to think that SingTel would choose to pare down it’s debts. In the third quarter results, SingTel reported current liabilities of almost $10 billion, way above the current assets of $6 billion. Non-current liabilities accounted for $10.8 billion dollars. The NetLink Trust IPO could help to alleviate its debt issue.

Trade With The Whale

Furthermore, upon NetLink Trust IPO, the deferred gain on the disposal of assets to NetLink Trust would be recognized in SingTel’s income statement and thereby help to bolster the telco’s financial result in 2018. As at 31 March 2016, the unamortised gross deferred gain was S$1.66 billion (2015: S$1.73 billion), of which S$273.6 million (2015: S$295.1 million) was applied to the Group’s carrying value of NetLink Trust and the remaining S$1.39 billion (2015: S$1.44 billion) was classified as ‘Net deferred gain’ in SingTel’s statement of financial position.

I am not vested in SingTel but in my previous article, I set an entry-level of $3.20. Looking at the bullish trend and the basis of the NetLink Trust IPO, such an entry price is not realistic, barring any unforeseen circumstances. The NetLink Trust IPO is likely to drive up SingTel share price to probably $4.20. I am reviewing my strategy and may enter this counter at $3.70. In any case, I will definitely participate in the subscription of the NetLink Trust IPO in 2018. Get ready for the ride.

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Add a Comment
  1. Try to get the idea: how can a company with $32m PBT be valued at 4.5b, when broadband penetration is 70+%, even though assuming 42% yoy growth?

  2. S$32 million post tax profits to SingTel in the last quarter financial results,(42% increase), i.e. S$128 mil. profit extrapolation in 12 months. Using P/E of 30, should be around S$4.0 bil.

  3. Hi Bruce,

    Financial performance and balance sheet are two different things.
    No hard feeling but I think you should learn how to analyse financial reports first before you invest.
    When you invest in a company, you don’t just look at the profit and loss statement. You also need to assess the cash flow and balance sheet to determine the health and then derive the value of stock.


  4. What do you think of the NetLink Trust IPO recently announced?

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