In a world ravaged by an insidious coronavirus, it is tough for many businesses to maintain revenue and profits.
Even telecommunication companies (telcos), which have traditionally been stable dividend payers, have not been spared.
Both StarHub (SGX: CC3) and Singapore Telecommunications Limited (SGX: Z74), or Singtel, released their earnings reports last month.
StarHub’s revenue declined by 15.2% year on year, while net profit after tax plunged by 25% year on year.
Singtel, which released its full fiscal year 2020 earnings report, saw its underlying net profit declined by 13% year on year.
Singapore’s largest telco also slashed its final dividend by nearly 50% to just S$0.0545.
Telcos are feeling the pressure from lower levels of roaming calls and lower handset sales.
NetLink NBN Trust (SGX: CJLU), on the other hand, has all three telcos as customers but can provide a much more stable dividend.
Let us explain how this works.
A resilient business model
To provide some background, NetLink NBN Trust is part of the NetLink Group, which forms the foundation of Singapore’s Next Generation Nationwide Broadband Network (NBN) that delivers high-speed internet access to businesses and households.
The group designs, builds, owns and operates the passive fibre network infrastructure consisting of ducts, manholes and central offices.
As of 31 March 2020, NetLink NBN Trust had installed 1.43 million residential fibre connections and 47,681 non-residential fibre connections.
Non-building address points (NBAP) and segment connections totalled 1,679 and 415, respectively, up from just 835 and 150 at the end of the fiscal year 2018.
These NBAP are network access points installed on non-building structures such as lampposts. They can enable a network signal to be obtained more easily, thus assisting the propagation of signals for internet connectivity.
NetLink NBN Trust also earns revenue from the installation of fibre connections and the diversion of ducts. These make up just 5.6% and 3.0% of the fiscal year 2020 revenue.
The bulk of the group’s revenue, or around 73%, still comes from making fibre connections.
This revenue is derived from a fixed monthly recurring charge on fibre connections.
Residential homes pay S$13.80 per month per connection, businesses pay S$55 while NBAP is charged S$73.80.
Stable and growing dividends
NetLink’s business model ensures a steady stream of recurring revenue is earned.
This revenue is not dependent on the level of usage of mobile services, which have been disrupted by the pandemic.
For the fiscal year ended 31 March 2019, NetLink paid out a distribution per unit (DPU) of S$0.0488, exceeding its forecast by 5.2%.
For the current fiscal year, the Trust’s DPU has increased by 3.5% year on year to hit S$0.0505.
At the last traded price of S$1.00, the shares offer a trailing 12-month dividend yield of around 5.1%.
5G as a growth catalyst
NetLink plans to continue its growth by connecting more households that are not yet on fibre.
Initiatives such as the Infocomm Media Development Authority’s (IMDA) Home Access programme will enable NetLink to gradually provide fibre access to low-income households.
The construction and completion of new HDB estate and private condominiums also serve as a growth avenue for NetLink.
In late April, Singtel and a joint venture by StarHub and M1 announced that they had won bids to operate 5G networks across Singapore.
The telcos are required to provide 5G coverage for at least half of Singapore by end-2022 and scale up to nationwide coverage by 2025.
As spending for 5G ramps up for new infrastructure and equipment, NetLink is poised to be a major beneficiary.
The increased coverage means that more NBAP will be required, providing a long-term boost to NetLink’s recurring income.
Get Smart: An indirect exposure to telcos
Buying NetLink is akin to buying a slice of our nation’s 5G future.
Gaining this exposure through telcos means that investors need to be put up with volatility in earnings and dividends as huge capital expenditures are required in the next few years for 5G technology.
NetLink NBN Trust offers indirect exposure to the telcos while ensuring steady and consistent revenue and cash flow.
Dividends should also move in tandem with cash flow and be much more stable.
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Disclaimer: Royston Yang owns shares in NetLink NBN Trust.