Would Warren Buffett Buy This SGX-Listed Stock?

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

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.

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.

residential
Residential

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.

non-residential
Non-residential

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

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.

Top 20 Deep Value (1)

DISCLAIMER
The information contained in this website is provided to you for general information/circulation only and is not intended to nor will it create/induce the creation of any binding legal relations. The information or opinions provided do not constitute investment advice, a recommendation, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person or group of persons acting on this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise.
You should seek advice from a financial adviser regarding the suitability of the investment products mentioned, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to purchase the investment product. In the event that you choose not to obtain advice from a financial adviser, you should assess and consider whether the investment product is suitable for you before proceeding to invest.
Any views, opinions, references or other statements or facts provided in this blog/website are personal views. No liability is accepted for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on the information provided herein.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s