NSIF Stock Pitch BUY Recommendation

Recommendation:

                BUY
NSIF Stock Pitch

   Group 5: Marcus, Andrew, Zhi You

Agenda

         Industry and company overview

         Investment thesis

         Financials

Industry Overview
● Singapore’s telecommunications sector is competitive, but not the fibre
  network sector
    ○   4 telco operators (Singtel, Starhub, M1, TPG) with several MVNO partners
    ○   Main fibre infrastructure provider in Singapore: Netlink Trust
● Main business segments for telco operators:
    ○   Mobile, Pay-TV, Broadband
● High capital expenditure for telco & fibre network operators to maintain &
  develop physical infrastructure
● Industry developments
    ○   Smart Nation Initiative 2015: government initiative to harness technologies and networks
        for enhanced connectivity
    ○   Roll-out of 5G technology in Singapore & planned release of 2 full-fledged licences by IMDA

What is Netlink NBN Trust (CJLU)?

Porter’s 5 Forces Analysis
                          Low bargaining         ●   Many suppliers for materials procurement & many
                          power of suppliers         contractors/developers for services outsourcing

                          Moderate bargaining    ●   Three major internet service providers (Singtel, M1,
                          power of buyers            Starhub) with other smaller players
                                                 ●   Regulated pricing model by IMDA

                          Low-moderate threat    ●   Fibre optics is currently the main technology underlying
                          of substitutes             broadband connections
                                                 ●   Netlink is poised to benefit from 5G rollout in Singapore

                          Low-moderate threat    ●   High barriers to entry due to 1) government regulation;
                          of new entrants            2) high capital startup costs
                                                 ●   Existing telcos & utility companies may contemplate
                                                     entering the fibre industry

                          Low industry rivalry   ●   Due to IMDA’s appointment, Netlink is effectively a
Industry Attractiveness                              monopoly operating Singapore’s fibre network

0.910
CJLU.SI
Market cap: 3.51B
Shares outstanding:
3.897B
PE: 44.33
PB: 1.1948
ROE: 2.5%

1. Well positioned for 5G roll-out

● Singapore is set to introduce 5G in 2020, with 50%

   coverage by 2023

● IMDA specifies 5G based on standalone network

   infrastructure, focusing on network sharing

● 5G capital expenditure estimated 2 -3x more than 4G

   and reach up to $1.5 billion by telcos

1. Well positioned for 5G roll-out

● Fibre network necessary for 5G base stations backhaul

   connections

● Future revenue for Netlink expected to increase
   ○ Netlink is the sole operator of Singapore’s fibre
     infrastructure
   ○ Fairer pricing as Netlink’s prices are regulated

2. Growth of residential segment
 ● Residential units are expected to grow at an annual
   rate of 2.3% between 2016 and 2021

 ● This translates to approximately 170,000 new
   residential premises in the market

2. Growth of residential segment

2. Growth of non-residential segment
●   Singapore’s emphasis on being an international business and technology
    hub

●   Future urban transformation projects up to 2023 which would require
    Netlink’s fibre capabilities once completed, eg., Punggol Digital District and
    Jurong Innovation District are potential clients

●   Reduce reliance on residential segment as bulk of revenue and increase the
    proportion of revenue in non-residential and NBAP segments

3. Resilient Business Model

● IMDA’s Regulated Asset Base model allows Netlink to earn
  80% of its revenue at a guaranteed, regulated rate of return
● For 2017 to 2022, IMDA sets fibre connection prices such
  that Netlink earns a 7% pre-tax return on capital
  investments
● A further 10% of its revenue comes from long-term contracts
  → 90% of revenue either regulated or contractual

3. Resilient Business Model

Sustainable Distribution Yield
● FY2019 distribution (dividend) yield of 6.0%
● Projected to sustain distribution yield at around 5.0 -
  6.0% up till FY2022 due to:
    ○   Monopolistic status

    ○   Strong growth potential

    ○   Resilient business model

● In the short to medium term, good defensive stock
  that can perform well in a potential recession as a
  dividend play

Financial Projections

Absolute Valuation - DCF Analysis
 CAPM                   Inputs    Source

 Risk-free rate         1.75%     SG 10Y Government Bond (October)

 Market risk premium    7.75%     Bloomberg WACC

 Beta                   0.342     Bloomberg Historical Beta

 Cost of equity         4.40%

                                           Implied Enterprise Value    SGD 5,820 M
WACC = 84.2% x 4.40% + 15.8% x 2.30%
     = 4.10%
                                           Implied Equity Value        SGD 5,260 M

PV of Cumulative FCFF      SGD 800 M       Shares Outstanding          3,897 M

PV of Terminal Cash Flow   SGD 5,020 M     Intrinsic Value per Share   SGD 1.35

Relative Valuation - P/E Analysis
● High PE Ratio : 44.3 compared to the Telecom industry
  average (17.5) and the Singapore market (13.4).
● From our investment theses, high expected growth rate
  might justify its high PE ratio
● Effect of Depreciation & Amortisation on EPS & hence
  PE ratio
● Difficulty in finding truly comparable companies
    ○   Bharat Broadband Network of India
    ○   Hong Kong Broadband Network PE ratio of 87.5

Conclusion

● Good medium-term prospects due to sustainable
  distribution yield at 6.0%
● Robust and resilient business model in an attractive industry
● Strong projected long-term growth from tailwinds &
  catalysts; backed by financials and valuation analysis
    ○   50% potential upside in capital appreciation