Many investors view Singtel (SGX: Z74) as a reliable source of dividends.
Not only has the blue-chip company been listed since November 1993, but it is also Singapore’s largest telco with a 47.4% share of Singapore’s mobile customer market.
Of late, however, Singtel’s dividend track record has been patchy.
The telco paid out lower year on year dividends for both fiscal 2020 (FY2020) and FY2021 ending 31 March, going from S$0.175 in FY2019 to S$0.075 in FY2021.
Dividends only increased year on year in FY2022 to S$0.093 but remained below FY2020’s S$0.1225.
Investors who want exposure to the telcos and Singapore’s next-generation broadband network (NBN) can look to NetLink NBN Trust (SGX: CJLU), or NetLink, instead.
NetLink designs, builds, owns and operates the passive fibre network infrastructure of Singapore’s next-generation NBN.
The group’s nationwide network provides internet coverage to both residential and non-residential homes in Singapore.
A slow but steady increase
The group was listed in July 2017, has a 31 March fiscal year-end and has been paying half-yearly distributions.
NetLink has posted a slow but steady increase in its distribution per unit (DPU).
For fiscal 2019 (FY2019), the first full year of distributions, NetLink paid out a DPU of S$0.0488.
By FY2022, the business trust paid out a DPU of S$0.0513 for a compound annual growth rate of 1.7%.
NetLink released its most recent set of earnings for fiscal 2023’s first half (1H2023) ending 30 September.
Once again, the trust reported a healthy set of earnings along with a rise in DPU.
Revenue rose 6.2% year on year to S$199.6 million while net profit jumped 36.1% year on year to S$54.6 million.
DPU inched up 2.3% year on year to S$0.0262.
Annualised DPU stands at S$0.0524, giving NetLink’s units a forward distribution yield of 6.1%.
More fibre connections in the future
Revenue continued to climb for NetLink in 1H2023 along with higher ancillary project revenue and higher connections revenue from the residential, non-residential, and NBAP (non-building address points) segments.
The number of fibre connections has been steadily increasing over the years.
For the residential segment, the number of connections rose from 1.43 million in FY2020 to 1.47 million for 1H2023.
The non-residential segment saw a bigger jump of 8.2%, going from 47,700 in FY2020 to 51,600 in 1H2023.
NBAP reported the largest jump of 52.2% as connections surged from 1,679 to 2,556 over the same period.
The residential and non-residential segments formed the bulk of NetLink’s revenue, at close to 70% for 1H2023.
NBAP revenue made up around 4% of total revenue.
While its contribution is low, this level was significantly higher than in FY2018, when NBAP revenue took up just 0.3% of total revenue.
Residential segment revenue has the potential to continue rising.
The Singapore government completed new HDB estates such as Bidadari in 2021.
There are plans to launch new build-to-order (BTO) projects in Bukit Batok, Tengah, and Yishun.
By February next year, another 2,900 to 3,900 BTO units will be offered in Kallang Whampoa, Queenstown, and Tengah.
In the longer term, Paya Lebar Air Base will be relocated in the 2030s, yielding a plot of land five times the size of Toa Payoh for future residential developments.
NetLink can ride on the growth of these estates and BTO launches to steadily increase its residential connections.
Pertinent risks to watch for
As with any investment, there are several risks that investors need to watch for.
NetLink is heavily regulated by the Infocomm Media Development Authority (IMDA) as it holds a monopoly on Singapore’s fibre network.
IMDA sets the pricing for NetLink’s services to the various telcos under the “Interconnection Offer” (ICO).
Prices under the ICO will be regulated using the Regulated Asset Base (RAB) model whereby NetLink can recover certain cost components from the regulator.
The return on capital is for five years starting from January 2018 and is currently set at 7%.
NetLink is undergoing a regulatory review with IMDA that is expected to complete by the first half of 2023.
Should the rate of return fall below 7%, this may impact the trust’s ability to recover expenses under the RAB, thus impacting its DPU.
Get Smart: Wait for the results of the review
While the growth in residential connections should continue to increase over the years, there is currently an overhang on NetLink’s shares as investors await the result of the review.
Investors may wish to wait for the results of the review before deciding on whether to add the trust to their buy watchlists.
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Disclaimer: Royston Yang owns shares of NetLink NBN Trust.