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Three things about NetLink Trust

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The biggest IPO since 2011, NetLink Trust will be listed in SGX main board at offering price of between $0.80 and $0.93, raising between $2.3 billion and $2.7 billion.

When investing in stocks, always invest in companies in which you understand their business models, their products and services. It is also important to assess the companies’ competitors and financial performances. This article will share three things about NetLink Trust which I hope investors will find useful.

NetLink Trust background

Most Singaporeans may be more familiar with OpenNet, the predecessor of NetLink Trust. In 2008, OpenNet was owned by a consortium consisting of SingTel (30%), SP Telecommunications (15%), Singapore Press Holdings (25%) and Canada’s Axia NetMedia (30%). However, in 2014, SingTel, through NetLink Trust, bought over all the shares of OpenNet from the rest of the major shareholders.

On looking back, the 2014 consolidation should be part of the strategic plan to implement Singapore government’s Next Generation Nationwide Broadband Network (Next Gen NBN), which is a project under the Intelligent National 2015 (iN2015) masterplan seeking to transform Singapore into an intelligent nation and global city, powered by infocomm.

NetLink Trust

Next Gen NBN is Singapore’s ultra-high-speed broadband network capable of delivering speeds of 1Gbps and above, offering connectivity to homes, offices and schools in Singapore.

What I like about NetLink Trust is that it is at the top of the value chain. It manages and operates the physical fibre optic platform. NetLink Trust also installs fibre network cables and Termination Boxes in homes and offices via their contractors. The second and third tiers in the Next Gen NBN ecosystem are the wholesale bandwidth services and retail services providers like SingTel, Starhub and M1.

According to Akamai Technologies’ survey in 2015, Singapore retained top position in the world with the highest average peak connection speed. To meet the demands of data-hungry Singaporeans, NetLink Trust uses optical fibre cables to transmit large amounts of data and at high speeds from country to country, through undersea submarine cables.

Optical Fibre cables are thin strands of glass, about the thickness of a strand of human hair, that permit the transmission of data using light over longer distances and at connection speeds of 1 Gbps and above.

Defensive business model

After covering the background, readers should now be able to understand better the business model, which is pretty simple and straight-forward. It should also be noted that since the acquisition of OpenNet in 2014, NetLink Trust is regulated by IMDA, in terms of its service level standard and price settings. Thus, I am not overly concerned about its infrastructure monopoly in Singapore because I have faith in the government ability to regulate NetLink.

With respect to each residential end-user connection, non-residential end-user connection, NBAP connection and segment fibre connection, NetLink Trust currently receives both a one-time installation charge and a recurring monthly fee. NetLink Trust also generates revenue from the provision of services in connection with its other non-fibre passive infrastructure (comprising ducts, manholes and central offices).

In view of the above business model, I like the defensive nature of the business whereby it charges businesses recurring monthly fee. Essentially it is a form of B2B transaction. If you talk about incomes from the residential and non-residential, the revenue would be substantial even for a small market like Singapore.

As of 31 March 2017, NetLink Trust has passed more than 1.4 million residential homes, or substantially all of the residential homes in Singapore, and reached 1.3 million residential homes. The network is also deployed to approximately 30,000, or substantially all of the non-residential premises in Singapore as of 31 March 2017.

In terms of the residential homes reach, NetLink Trust may be reaching its maximum coverage and there is limited headroom for growth. However, it is the non-building address point (“NBAP”) that I am excited about. NBAPs refer to locations such as roadside points, bus stops, traffic lights and multi-storey car parks.

NBAP applications include fibre connectivity for telecommunications operators (such as wireless network base stations), surveillance cameras, sensors, outdoor digital signage, outdoor kiosks and ATM machines.

NetLink Trust anticipates that the demand for NBAP services will continue to grow with the roll-out of Singapore’s Smart Nation programme, which aims to apply digital and smart technologies to improve citizens’ lives in key domains.

Business Performance

Business performance for NetLink Trust is good. Revenue increased from $258 million in FY2016 to $300 million in FY2017. The majority of the revenue source (61%) was derived from residential connections and this segment is likely to plateau in the coming years as the number of residential premises for which the fibre had been deployed reached 100%. Currently, the figure for residential connections is 89.2%.

Going forward, I would like to see NetLink Trust diversify its revenue sources and increase revenue from non-residential and non-building sources. I am still considering whether to participate in the upcoming IPO or to wait for a few more quarterly financial results before making a move.

For a while, I had been anticipating this IPO of the year but given the bullish demand for this stock, I am cautious to take a contrarian approach. I think when everyone is buying, it is better to avoid. Till then, enjoy the ride.

Read my articles on NetLink Trust:

  1. SingTel’s NetLink Trust IPO application approved
  2. SingTel’s shares to rocket on NetLink Trust IPO?
  3. Can SingTel fight gravity?
  4. SingTel at a cross-road

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