Warren Buffett repeatedly emphasizes that an investor must invest into a company that offers a durable competitive advantage. Any company that has a durable competitive advantage is likely to be able to maintain its profitability over a long period of time.
Businesses that possess at least one factor of Porter’s 5 forces model would possess a competitive advantage. For example, a business that has few or no competitors would allow the company to continually generate high levels of profit.
NetLink NBN Trust perfectly fits this criteria and is probably the most defensive stock listed on the SGX. Here’s why:
NetLink Trust owns, and operates the passive fiber network infrastructure for homes and non-residential premises in Singapore.
It licenses its network for use in the provision of broadband, Internet-protocol TV, fiber connections and other ancillary services.
The company’s fiber network infrastructure includes ducts, manholes, fiber cables, and central offices. As of March 31, 2018, it had an estimated 1.2 million residential and 43,855 non-residential end-user connections.
Netlink Trust’s network is the foundation of Singapore’s next-gen National Broadband Network (NBN) and has a monopoly on the nationwide residential fibre coverage, its business model is resilient against economic shocks. NetLink Trust has a resilient business model, which attributed to four fundamental advantages:
- Recurring, predictable cash-flows.
- Long-term contracts /customer stability.
- Regulated revenues.
- Creditworthy customers.
Core strengths & competencies
Caters to basic necessities. Fixed broadband connections are basic necessities as
our daily activities now require access to Internet and cloud-based services. In Singapore, telcos typically provide unlimited data for fixed broadband, which means that users could conveniently download and upload lots of data.
High barriers to entry. Government regulations and licenses and massive infrastructure investments are high barriers to deter competitors from challenging NetLink’s dominant position. The group received an estimated S$732m worth of grants for the construction of passive fibre infrastructure.
Without similar support from the government, it would be almost impossible for any potential competitor to match NetLink’s extensive nationwide coverage or current regulated wholesale pricing.
Blue-chip customer base. Singapore’s telecom industry is dominated by 3 major players, Singtel, StarHub and M1. NetLink is the primary network provider to these Retail Service Providers (RSPs) who purchases bandwidth connectivity from
NetLink while providing competitive and innovative services to end-users.
Dominant market share. NetLink has dominant market share of 90% for residential and 35% for non-residential fibre connections.
1.Residential: NetLink added 24,600 residential connections recently, representing an increase of 2.1% qoq. There is an untapped market of 300,000 residential homes, represents homes not on fibre broadband and new residential developments over the next five years.
NetLink will expand network coverage to new housing estates in Sengkang, Punggol and Tengah and the Greater Southern Waterfront project. The government’s Home Access Programme will further increase penetration for fibre broadband by providing subsidy of up to S$21.50 per month for low-income households.
2.Non-residential: NetLink recently added 900 non-residential connections, up 2.1% qoq. Many SMEs are getting connected to fibre broadband due to SMEs Go Digital programme that provide government grants for digital solutions to enhance productivity.
NetLink’s competitive advantage lies in areas outside of CBD and business parks due to its extensive nationwide coverage. There are also opportunities for growth at Jurong Innovation District and Punggol Digital District.
Stable and recurrent revenue streams. Pricing for residential and non-residential fibre connections are fixed at S$13.80 and S$55.00 per month for the next five years (Jan 18 to Dec 22).
They are unaffected by market competition, including new entrants penetrating the fixed broadband market, and economic cycles. NetLink is also unaffected when fibre broadband subscribers switch from one retail service provider to another.
Growth & Opportunities
NetLink Trust is well-positioned to deliver long-term value and growth:
- Critical infrastructure enabling Singapore’s Next Gen NBN.
- Resilient business model with transparent, predictable and
regulated revenue stream.
- Sole nationwide provider of residential fibre network in
- Well-positioned to benefit from growth in the non-residential
segment as the independent nationwide network provider.
- Well-positioned to capitalise on growth in connected services
including Singapore’s Smart Nation initiatives.
- Extensive nationwide network affording natural barrier to entry.
Growth for Netlink NBN Trust will likely be driven by the new development of residential areas and Singapore’s push to transform into a smart nation.
Smart Nation initiatives drive demand for NBAP connections. Heading into 2019, NetLink added 294 non-building access point (NBAP) connections, representing an expansion of 35.2% qoq. NetLink provides fibre connections sensors to support applications, such as high-definition surveillance cameras and advertising billboards.
Entry of fourth mobile operator. TPG Telecom is a potential customer and relies on NetLink’s networks for transmission. TPG would require NBAP connections for 3,000 base stations over the next three years.
The advent of 5G will increase the usage of mobile networks. In future, all mobile operators will require more NBAP connections for 5G connectivity.
Changing consumer demand. The 3 major telcos were quick to respond to changing consumer demand. Major Telcos now partners with mobile virtual network operators (MVNO) to cater to growing demand for mobile data and fibre broadband. With the increasing usage of social media, e-commerce, artificial intelligence and deep technology, NetLink looks well-positioned to benefit from this secular trend.
Attractive distribution yield with low risk
Assuming the distribution for the second half of the financial year is the same as the first half, the annualised DPU of 4.88 cents represents an increase of 5.2% over the projected DPU of 4.64 cents.
NetLink is trading at 6.3% yield as of end FY18, 6.6% FY19F, similar to large-cap industrial S-REIT’s average yield. NLT should trade at a tighter yield spread than STI and most S-REITs in general especially industrial S-REITs as:
- Due to the regulated nature of its business – largely independent of economic cycles.
- Its gearing is less than half of S-REIT’s with ample headroom for debt-funded acquisitions.