News analysis

How will the market like NetLink's safe and unsexy IPO?

Large issue size means sentiment will have a big role to play

That Singapore's largest stock market flotation in six years had a sizeable $2.2 billion placement tranche that was two times subscribed is solid proof that the hunt for yield is not over.

NetLink NBN Trust's initial public offering (IPO), which promises investors an annualised dividend yield of 5.43 per cent for the period to March 31 next year, has been likened to a bond IPO for its low risk and return profile.

The analogy seems apt.

The lion's share of the fibre-optic cable owner's turnover - 80 per cent - is regulated revenue under a Regulated Asset Base (RAB) model recently adopted by the Info-communications Media Development Authority.

Under this regime, NetLink's return on investments from its regulated assets - ducts, manholes and fibre - is fixed.

In particular, NetLink's return on capital for the next five years will be based on a pre-tax weighted average cost of capital of 7 per cent.

NetLink Trust CEO Tong Yew Heng is not worried that wired broadband may get displaced by wireless broadband, delivered via mobile networks. "The fibre network is future-proof because it has unlimited capacity (and) fibre carries a very wide bandwidth
NetLink Trust CEO Tong Yew Heng is not worried that wired broadband may get displaced by wireless broadband, delivered via mobile networks. “The fibre network is future-proof because it has unlimited capacity (and) fibre carries a very wide bandwidth as opposed to mobile,” he said. PHOTO: MARCUS TAN FOR THE STRAITS TIMES

So while it may seem alarming that the regulator's latest revision exercise will slash NetLink's monthly recurring charge for residential end-user connections from $15 to $13.80 a month starting January next year, the regulated revenue should hold steady overall.

Chief executive Tong Yew Heng said: "We should not focus too much on the pricing. Pricing to the end users is a derived number because it is the regulated revenue divided by the number of users.

"As long as the number of users increases, the pricing will come down."

In reality, revenue should rise as NetLink adds to its investment by laying more cables.

But rarely do you find a business that is safe and sexy at the same time, and NetLink is no exception.

Growth, as far as the trust manager sees it, means growing organically in Singapore by expanding NetLink's fibre network and improving its reliability.

Although NetLink expects the roll-out of more Smart Nation initiatives such as the deployment of islandwide sensors to drive growth, the size of this business - which gets booked as NBAP revenue - is still a very small fraction of the whole.

NBAPs are non-building address points, such as traffic lights, Electronic Road Pricing gantries and carparks. NBAP connections are forecast to rake in between 0.3 per cent and 0.4 per cent of total revenue in the next two years.

About 60 per cent of revenue will still come from the monthly fee that telcos and broadband retailers pay it for residential connections.

NetLink is also not yet up to scratch with certain quality standards. It is required by regulation to fulfil 98 per cent of all service orders for residential connections within three days of receiving the request from a telco, but is managing only 91 per cent now. To address this, NetLink is in the process of topping up its spare fibre capacity, with completion targeted by March 2019, but Mr Tong refrained from putting out a definite timeline on when the standards would be met.

Perhaps the biggest risk is whether - or when - the day will come when wired broadband gets displaced entirely by wireless broadband, delivered via 3G, 4G or 5G mobile networks.

Mr Tong sees no substitution risk: "The fibre network is future-proof because it has unlimited capacity (and) fibre carries a very wide bandwidth as opposed to mobile."

An industry report in the prospectus expects commercial launches of 5G services to take place no earlier than 2020. No common technical architecture for the 5G standard has been set yet, although this is a space that might be worth watching.

For now, the larger question is how the market will receive NetLink NBN Trust on its debut. With a massive offer size of $2.3 billion, the supply of units is large so sentiment will have a big role to play.


Correction note: An earlier version of this story said that NetLink's IPO was both safe and sexy. This is the result of an editing error.

A version of this article appeared in the print edition of The Straits Times on July 12, 2017, with the headline 'How will the market like NetLink's safe and sexy IPO?'. Print Edition | Subscribe