Netlink Trust

[grubb]

From page 63 and 109 of the prospectus, we can see that Singtel received proceed of about $2.7B from the numerous sale of assets (manholes, ducts, offices) to NLT, and then the sale of the 75% stake of NLT to NetLink NBN Trust.

About $2.2B of the IPO proceeds were used to pay for the assets and the 75% NLT stake, with the remaining $510m loaned from banks. This $2.2B amounts to about 93% of the total IPO proceeds of $2.35B. So IPO subscribers effectively bought out (75% of) Singtel's manholes, ducts, and related offices. Nothing wrong with this, but at what price did IPO subscribers pay?

At an IPO price of 81 cents but with earnings only at 2 cents, we have a whopping p/e of 40. If you look at page 42 where a forecast of 2018 and 2019 is provided, EPU is expected to fall to 1.14 and 1.7, respectively. Will IMDA (the regulator) allow for price increases? Perhaps, but any increase will likely be small. This is because raising prices will also mean retail customers like ourselves has to pay more for our broadband, which is the opposite of what the government wants.

So Singtel, the real winner here, has effectively hedged itself against the emergence of new (wireless) broadband technology over the next 40 years with this IPO. I'm not tech whizz, but I'm guessing we will see new technology in this field in less than 40 years. What then, will the units of NetLink NBN Trust be worth?

Currently, I believe the units of NetLink NBN Trust to be very overpriced.

You hit the nail on the head, that's why i didn't join in the fun...

The whole point of a business trust is to allow it to distribute more than its accounting profits, because it has very high depreciation, which is because it has very high upfront capex. 

You could be skeptical of Singtel's motives in cashing out, fair enough. But P/E is the wrong metric to gauge its valuation, IMO.

[corydorus]

From page 63 and 109 of the prospectus, we can see that Singtel received proceed of about $2.7B from the numerous sale of assets (manholes, ducts, offices) to NLT, and then the sale of the 75% stake of NLT to NetLink NBN Trust.

About $2.2B of the IPO proceeds were used to pay for the assets and the 75% NLT stake, with the remaining $510m loaned from banks. This $2.2B amounts to about 93% of the total IPO proceeds of $2.35B. So IPO subscribers effectively bought out (75% of) Singtel's manholes, ducts, and related offices. Nothing wrong with this, but at what price did IPO subscribers pay?

At an IPO price of 81 cents but with earnings only at 2 cents, we have a whopping p/e of 40. If you look at page 42 where a forecast of 2018 and 2019 is provided, EPU is expected to fall to 1.14 and 1.7, respectively. Will IMDA (the regulator) allow for price increases? Perhaps, but any increase will likely be small. This is because raising prices will also mean retail customers like ourselves has to pay more for our broadband, which is the opposite of what the government wants.

So Singtel, the real winner here, has effectively hedged itself against the emergence of new (wireless) broadband technology over the next 40 years with this IPO. I'm not tech whizz, but I'm guessing we will see new technology in this field in less than 40 years. What then, will the units of NetLink NBN Trust be worth?

Currently, I believe the units of NetLink NBN Trust to be very overpriced.

You hit the nail on the head, that's why i didn't join in the fun...

The whole point of a business trust is to allow it to distribute more than its accounting profits, because it has very high depreciation, which is because it has very high upfront capex. 

You could be skeptical of Singtel's motives in cashing out, fair enough. But P/E is the wrong metric to gauge its valuation, IMO.

I know depreciation can be conducted in accounting ( not an expert ) of a production property to zero in 10 years. After 10 years, factory and land value still there and may even increase significantly. Same with the ducts. So earning will get hit due to such item but they are cashless.

[Life is a game]

Well at least everything about this company is trustworthy and the assets are really there to provide recurring income. The cost of the business is high barrier so won't expect much competition. Probably 15 to 20 years to recover back 100% capital through dividends reinvested and assuming the yield remains constant. I don't think anyone who invested in this counter is expecting a multi bagger.

Vested in this counter but small amount.

Sent from my SM-N9005 using Tapatalk

[Temperament]

Just for fun.

i think price will drift lower to 0.75.

When shall i buy?

Didn't apply IPO.

Just scan through pre IPO articles - found not "excitable enough" to apply lol.

[Ray168]

SingTel 1.3B richer

Southeast Asia's largest telecommunications company may be on the hunt for acquisitions following the highly anticipated public listing of Netlink NBN Trust , which raised about 2.35 billion Singapore dollars ($1.72 billion).


........................

IMO, Invest in SingTel better than NetLink.

[corydorus]

SingTel 1.3B richer

Southeast Asia's largest telecommunications company may be on the hunt for acquisitions following the highly anticipated public listing of Netlink NBN Trust , which raised about 2.35 billion Singapore dollars ($1.72 billion).


........................

IMO, Invest in SingTel better than NetLink.

My bet on the statement
Debt par down and sustain their dividends for future years due to reducing cash flow. They can also raise cheap fund again with lower debt.


"On the proceeds from the IPO, Chua said: "We will use that to pay down debt, investments in our existing business, investments in growth initiatives, and we're looking at other capital management initiatives."

Those initiatives may include deleveraging the telco's balance sheet or issuing a special dividend, but Singtel said it's evaluating its options to act in the best interest of stakeholders."

[tanjm]

From page 63 and 109 of the prospectus, we can see that Singtel received proceed of about $2.7B from the numerous sale of assets (manholes, ducts, offices) to NLT, and then the sale of the 75% stake of NLT to NetLink NBN Trust.

About $2.2B of the IPO proceeds were used to pay for the assets and the 75% NLT stake, with the remaining $510m loaned from banks. This $2.2B amounts to about 93% of the total IPO proceeds of $2.35B. So IPO subscribers effectively bought out (75% of) Singtel's manholes, ducts, and related offices. Nothing wrong with this, but at what price did IPO subscribers pay?

At an IPO price of 81 cents but with earnings only at 2 cents, we have a whopping p/e of 40. If you look at page 42 where a forecast of 2018 and 2019 is provided, EPU is expected to fall to 1.14 and 1.7, respectively. Will IMDA (the regulator) allow for price increases? Perhaps, but any increase will likely be small. This is because raising prices will also mean retail customers like ourselves has to pay more for our broadband, which is the opposite of what the government wants.

So Singtel, the real winner here, has effectively hedged itself against the emergence of new (wireless) broadband technology over the next 40 years with this IPO. I'm not tech whizz, but I'm guessing we will see new technology in this field in less than 40 years. What then, will the units of NetLink NBN Trust be worth?

Currently, I believe the units of NetLink NBN Trust to be very overpriced.

I think you may have over estimated technology turn over. There are probably 2 kinds of tech that is relevant. (A) the signalling mechanism and (B) some really really revolutionary new tech like quantum coupling, which invalidates Netlink's manholes and tunnels. For (A), Netlink trust only has to change the headends/hubs not the cable itself. Some capital expenditure true, but I presume the regulator would take this into account when setting the price, assuming Netlink has not tossed up the relationship with the regulator. For (B), this is significant new tech. So significant that it would take decades from POC to industrialization to widespread adoption. And it is by no means even predictable.

I also note that a yield of 5.4% for 40 years with a zero terminal value is still a nice looking 4.46% IRR with today's cost of riskless capital. Just for comparison.

No, I still think the main risk is regulator risk. Given the past history of Singapore regulators (if netlink trust were Malaysian for example, I would stay away with a barge pole), I would assign it a moderate to moderately low risk.

For this reason, I think it is not "very overpriced", but certainly would be inclined to pick up some with a haircut approximately 10% from IPO price.

EDIT: just to be clear, I consider the major asset of netlink trust to be its ducts and tunnels, NOT the cabling or the electronics. If renewal is needed, the electronics (aka headends etc) is much more likely than the cabling. Even so, the regulator is likely to take into account capital expenditure when setting the price of access. The only issue might be if the ducts and tunnels became useless - hence scenario B.

[karlmarx]

The whole point of a business trust is to allow it to distribute more than its accounting profits, because it has very high depreciation, which is because it has very high upfront capex. 

You could be skeptical of Singtel's motives in cashing out, fair enough. But P/E is the wrong metric to gauge its valuation, IMO.

Hi grubb, thank you for bringing up this point. Indeed, NetLink NBN Trust could distribute more dividends than its accounting profits, but this is only because its 1) capital expenditure is less than its depreciation and 2) it funds its dividends with loans.

1) From page 88 of the IPO prospectus it says, 'Excluding non-recurring capital expenditure, the Trustee-Manager expects the annual capital expenditure to be in the range of S$40 million to S$60 million for Forecast Period 2018 and Projection
Year 2019.' Depreciation ranged from $114m to $122m from FY15 to FY17. Why is depreciation double of recurring capital expenditure? Perhaps they depreciate their PPE too quickly? On page 95 it says, 'In computing the regulatory depreciation, the useful life of ducts and manholes is assumed to be 35 years and fibre (and related infrastructure) is assumed to be 25 years.' Their depreciation policy seems sensible. So again, why is depreciation double of capital expenditure? Is Singtel only spending half of what is required to upkeep the assets? Or did Singtel sell the assets to NetLink NBN Trust at twice its cost, and hence twice the depreciation?

2) On page 82, it is shown that the projected dividend of $113m for 2018 (which provides the projected yield of 5.43%) is funded by $118m from a revolving loan facility. For 2019, the projected divided of $179m (which provides the projected yield of 5.73%) is supported by $75m of loans and $42m of depreciation; its depreciation is $153m while capital expenditure is only $111m.

Since the projected dividends for 2018 and 2019 are mainly supported by loans and depreciation, I'm not so sure if it is wise for unitholders to expect their dividends to be sustained in this manner, for the long term. Does the Trustee-Manager intend to continue making loans to pay to unitholders? Is the Trustee-Manager not spending enough capital expenditure to upkeep the assets, or did the unitholders purchase the assets at inflated price (and hence, depreciation)?

By the way, the projected yield for 2018 is 3.61%, not 5.43%. 5.43% is the annualised yield. Quite sneaky of them to market like this.

Do correct my understanding if it is incorrect.

[karlmarx]

I think you may have over estimated technology turn over. There are probably 2 kinds of tech that is relevant. (A) the signalling mechanism and (B) some really really revolutionary new tech like quantum coupling, which invalidates Netlink's manholes and tunnels. For (A), Netlink trust only has to change the headends/hubs not the cable itself. Some capital expenditure true, but I presume the regulator would take this into account when setting the price, assuming Netlink has not tossed up the relationship with the regulator. For (B), this is significant new tech. So significant that it would take decades from POC to industrialization to widespread adoption. And it is by no means even predictable.

I also note that a yield of 5.4% for 40 years with a zero terminal value is still a nice looking 4.46% IRR with today's cost of riskless capital. Just for comparison.

No, I still think the main risk is regulator risk. Given the past history of Singapore regulators (if netlink trust were Malaysian for example, I would stay away with a barge pole), I would assign it a moderate to moderately low risk.

For this reason, I think it is not "very overpriced", but certainly would be inclined to pick up some with a haircut approximately 10% from IPO price.

EDIT: just to be clear, I consider the major asset of netlink trust to be its ducts and tunnels, NOT the cabling or the electronics. If renewal is needed, the electronics (aka headends etc) is much more likely than the cabling. Even so, the regulator is likely to take into account capital expenditure when setting the price of access. The only issue might be if the ducts and tunnels became useless - hence scenario B.

Hi tanjm, you certainly are an expert of broadband technology! I know not much about it and where the speculating the future of what I don't know is concerned, I prefer to be more conservative. My statement that it is overpriced should be understood with reference to my lack of competence in this area.

[corydorus]

The whole point of a business trust is to allow it to distribute more than its accounting profits, because it has very high depreciation, which is because it has very high upfront capex. 

You could be skeptical of Singtel's motives in cashing out, fair enough. But P/E is the wrong metric to gauge its valuation, IMO.

Hi grubb, thank you for bringing up this point. Indeed, NetLink NBN Trust could distribute more dividends than its accounting profits, but this is only because its 1) capital expenditure is less than its depreciation and 2) it funds its dividends with loans.

1) From page 88 of the IPO prospectus it says, 'Excluding non-recurring capital expenditure, the Trustee-Manager expects the annual capital expenditure to be in the range of S$40 million to S$60 million for Forecast Period 2018 and Projection
Year 2019.' Depreciation ranged from $114m to $122m from FY15 to FY17. Why is depreciation double of recurring capital expenditure? Perhaps they depreciate their PPE too quickly? On page 95 it says, 'In computing the regulatory depreciation, the useful life of ducts and manholes is assumed to be 35 years and fibre (and related infrastructure) is assumed to be 25 years.' Their depreciation policy seems sensible. So again, why is depreciation double of capital expenditure? Is Singtel only spending half of what is required to upkeep the assets? Or did Singtel sell the assets to NetLink NBN Trust at twice its cost, and hence twice the depreciation?

2) On page 82, it is shown that the projected dividend of $113m for 2018 (which provides the projected yield of 5.43%) is funded by $118m from a revolving loan facility. For 2019, the projected divided of $179m (which provides the projected yield of 5.73%) is supported by $75m of loans and $42m of depreciation; its depreciation is $153m while capital expenditure is only $111m.

Since the projected dividends for 2018 and 2019 are mainly supported by loans and depreciation, I'm not so sure if it is wise for unitholders to expect their dividends to be sustained in this manner, for the long term. Does the Trustee-Manager intend to continue making loans to pay to unitholders? Is the Trustee-Manager not spending enough capital expenditure to upkeep the assets, or did the unitholders purchase the assets at inflated price (and hence, depreciation)?

By the way, the projected yield for 2018 is 3.61%, not 5.43%. 5.43% is the annualised yield. Quite sneaky of them to market like this.

Do correct my understanding if it is incorrect.

HDB is 99 Years. Manhole ducts easily can meet this life. 35 years are more conservative accounting purposes.