Growth Aspects of its Business

• Migration from slower technologies like Asymmetric Digital Subscriber Line (ADSL) and Hybrid Fiber-Coaxial (HFC) to fibre-based networks: This can be supported by the increasing competition among RSP which allows broadband plans to be more affordable. Additionally, various RSP are working towards retiring the ageing technologies as it might not be commercially viable for them to maintain it. Singtel has shut down its copper-based ADSL network in April this year and has offered fibre packages to the affected 47,000 customers. Starhub has also recently announced that they have ceased further rollout of its HFC network to new residential and commercial buildings. The switch from ADSL and HFC to fibre-based networks should lead to higher residential end-user connections.

Source: Analyst Briefing Presentation Slide

• Population growth: As the COPIF 2013 requires an optical fibre termination point to be pre-installed in each new home, new BTO launches pave the way for organic growth in the number of end-user connections. In addition, Netlink is targeting to expand its network coverage to upcoming townships such as the new Tengah estate. The first batch of 1,500 HDB in the estate will be launched in November this year and it is expected to house a total of 42,000 new units by the end of two decades. Furthermore, it is announced that 2,000 more BTO flats will be launched next year with shorter waiting times. I believe the greater supply of new accommodation will provide a boost to the number of residential end-user connections.

NBAP

• Launch of TPG Telecom in second half of 2018: Netlink stands to reap benefits through the provision of new NBAP connections for TPG's mobile network deployment.
• Smart Nation Programme: The demand for NBAP services is expected to grow with the roll-out of Singapore's Smart Nation Programme. This includes initiatives such as the installation of surveillance cameras at HDB blocks and carparks and autonomous vehicles. 
• HetNet base stations: Heterogeneous Network which allows users to switch seamlessly between cellular and WiFi networks, was first rolled out by M1 in 2016. Other RSP are also assessing plans to roll out HetNet across Singapore after trial participation in the Jurong Lake District. Netlink is expected to provide the necessary fibre network infrastructure for the initiative. 
• Wireless@SG: Singaporeans should be pretty familiar with the Singapore's public wifi hotspot initiative ("Wireless@SG") which was launched in 2006. IMDA is on track to double its network of hotspots to 20,000 by 2018 which can reach more locations, even hawker centres! Netlink is expected to support the deployment of next phase of Wireless@SG with fibre broadband connection for the access points. 

Source: Analyst Briefing Presentation Slide

Distribution Yield

Unlike REITs which are required to pay out at least 90% of their taxable income to the unitholders in order to enjoy tax exemption, business trusts are not required to distribute dividends.

In spite of that, Netlink NBN Trust has a distribution policy in place. Basically, it is a two-tiers system due to the business trust structure. Netlink will distribute at least 90% of its distributable income to Netlink NBN Trust, after setting aside reserves for future capital expenditure, working capital, debt repayment, etc. Subsequently, Netlink NBN Trust will distribute 100% of its available cash to the unitholders after paying for the Trust-related expenses and fees, etc. 

Source: Analyst Briefing Presentation Slide

At my entry price, the distribution yield is calculated to be 5.72% based on FP2018 forecast. If the 5.5% projected growth is included, the yield should increase to 6.04%. As such, I believe it is reasonable to expect a distribution yield within this range.

Key Concerns

• Heavily Regulated Environment: Netlink operates in a highly regulated industry and the provision of Netlink's principal services is subjected to terms and conditions of the Facilities-Based Operator license. This has a significant impact to its revenue as 80.1% of it is regulated under the Regulatory Asset Base model. This is evident from the review of its pricing terms which was conducted by IMDA every five years to ensure its affordability. Most of the wholesale prices that Netlink is able to charge has recently been reduced with effect from 1 Jan 2018 as follows:

Source: Excerpt of the revised pricing for Residential segment from IPO Prospectus

• Meeting minimum QoS standards: Due to the tightly regulated industry, Netlink is required to meet certain Quality of Services ("QoS") guideline with respect to its provision of connection services. As a matter of fact, Netlink has been fined 6 times in 5 years for failing to deliver orders to home and business broadband users within the stipulated timeframe. These fines add up to a total of $2.14 million. While meeting a certain quality standards is part and parcel of operating in a regulated environment, it appears that Netlink faces difficulty in complying which inevitably amplified its business expense through the imposition of fines. 
• Concentration/Geographical Risk: As Netlink is principally engaged in providing fibre-related services in Singapore, it faces a certain degree of geographical and concentration risk to rely on a niche market in a single country. 
• Technological Obsolescence / Substitution Risk: Singtel's ADSL service was first launched in 1997 and was completely shut down in 2018. Starhub's HFC network has been an important part of Singapore's early broadband development since 2003 and Starhub has ceased its further rollout in 2018 as well. Having launched in 2007, the fibre broadband has been around in Singapore for a decade and is definitely not something new. With greater data consumption and our growing hunger for higher speed Internet access, it may seem inevitable that wired broadband will be displaced in future. Some of the potential substitution threats have their sources from (1) wireless broadband and (2) unlimited mobile data plans. 

(1) With the proliferation of wireless broadband, it raises questions on whether this will reduce the relevancy of fibre technology in future. Netlink has since cited some of the drawbacks of wireless broadband such as limited speed, higher network latency and inability to match the reliability and coverage of wired broadband. 

(2) These days, telco operators are rolling out unlimited mobile data plans which offers the possibility for light users to ditch their home broaband plans. However, telco operators usually throttle the surfing speed of their mobile subscribers once their local data usage exceed a certain threshold. Therefore, with the reasons stated above, I am not too concerned with the possibility of technological obsolescence at this stage. In my humble opinion, I would think that fibre broadband will not be easily displaced as a stable means of high speed data transmission in the near term.