Netlink Trust

[grubb]

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.

Hi karlmarx,

There is a part in the prospectus (sorry I'm too lazy to find the page number) which says that the PPE will last longer than the depreciation schedule. So it is only normal that maintenance capex is less than depreciation, and its not a sign that they are under-investing.

The loans are drawn down to fund the capex in 2018 and 2019. Netlink still has a little way to go to fully deploy its network. I believe there is a section in the prospectus where they say that they need to add 50% excess capacity of what is needed, following which we will see recurring capex at the amount you pointed out.

Projected yield for 2018 is 3.61%, because the period is between July or Aug starting after IPO (sorry I can't remember) to March 2018. following that, the full year will be from march to march. 

As for how dividends are going to be sustained, they will be funded by cash generated which will be more than accounting profits. What we have not discussed is the pricing, because this is controlled by MDA, and they are using the RAB model which allows Netlink to recover its costs + a WACC. So maybe 20-30 years later once Netlink has recovered all its costs from the initial deployment of the network, MDA may cut the pricing significantly (not considering the additional capex starting from today). But thats a discussion 20 years later anyway so who cares. I'm not clear on the RAB model myself so feel free to comment. Thanks.

btw i'm not selling netlink or anything. this is not a opinion to buy or sell.

[tanjm]

As for how dividends are going to be sustained, they will be funded by cash generated which will be more than accounting profits. What we have not discussed is the pricing, because this is controlled by MDA, and they are using the RAB model which allows Netlink to recover its costs + a WACC. So maybe 20-30 years later once Netlink has recovered all its costs from the initial deployment of the network, MDA may cut the pricing significantly (not considering the additional capex starting from today). But thats a discussion 20 years later anyway so who cares. I'm not clear on the RAB model myself so feel free to comment. Thanks.

This underlines my point. The main risk is regulator risk. They control the price at which Netlink trust can charge for access to residential broadband. This long term, you cannot assess any specific current method IMO. You can only try to guess at the philosophy behind the regulator and make a bet it stays consistent.

In my opinion, in line with modern practice, the regulator will want to make it economically viable for netlink trust to efficiently maintain the network (which is regarded as a core strategic pillar). This means that cost of capital has to come into play. The cost of capital is in turn influenced by the rate of inflation and current interest rates. It should take into account any incentive for necessary new capital expenditure to maintain non-obsolescence.

Also, if we are looking 15-30 years down the line, there will be a leverage effect from the deployment of IOT in every day life. Some of the IOT will go wireless (because they aren't inherently traffic intensive), but some may come down to Netlink trusts ducts and manholes. Which means the fee that service providers pay Netlink trust is supported by a bigger pie.

Actually, I have a question : Singtel, M1 etc have cell towers right? But the cell towers have to connect to the back bone somewhere. So whos wired connection do they use? I won't be surprised if SingTel has its own wired network to support this, but what about starhub/m1... ?

[activistasia]

As for how dividends are going to be sustained, they will be funded by cash generated which will be more than accounting profits. What we have not discussed is the pricing, because this is controlled by MDA, and they are using the RAB model which allows Netlink to recover its costs + a WACC. So maybe 20-30 years later once Netlink has recovered all its costs from the initial deployment of the network, MDA may cut the pricing significantly (not considering the additional capex starting from today). But thats a discussion 20 years later anyway so who cares. I'm not clear on the RAB model myself so feel free to comment. Thanks.

This underlines my point. The main risk is regulator risk. They control the price at which Netlink trust can charge for access to residential broadband. This long term, you cannot assess any specific current method IMO. You can only try to guess at the philosophy behind the regulator and make a bet it stays consistent.

In my opinion, in line with modern practice, the regulator will want to make it economically viable for netlink trust to efficiently maintain the network (which is regarded as a core strategic pillar). This means that cost of capital has to come into play. The cost of capital is in turn influenced by the rate of inflation and current interest rates. It should (by right) take into account any necessary new capital expenditure to maintain non-obsolescence.

Also, if we are looking 15-30 years down the line, there will be a leverage effect from the deployment of IOT in every day life. Some of the IOT will go wireless (because they aren't inherently traffic intensive), but some may come down to Netlink trusts ducts and manholes. Which means the fee that service providers pay Netlink trust is supported by a bigger pie.

Actually, I have a question : Singtel, M1 etc have cell towers right? But the cell towers have to connect to the back bone somewhere. So whos wired connection do they use? I won't be surprised if SingTel has its own wired network to support this, but what about starhub/m1... ?

Hi Tanjm, the cell towers are connected to their own back bone. But for Hetnet deployment (in the future) it is very likely StarHub will have to utilized NLT's fibre because NLT's fibre are available at more areas than Starhub's own back bone. It is also likely that TPG will use NLT's backbone

[WolfT]

As for how dividends are going to be sustained, they will be funded by cash generated which will be more than accounting profits. What we have not discussed is the pricing, because this is controlled by MDA, and they are using the RAB model which allows Netlink to recover its costs + a WACC. So maybe 20-30 years later once Netlink has recovered all its costs from the initial deployment of the network, MDA may cut the pricing significantly (not considering the additional capex starting from today). But thats a discussion 20 years later anyway so who cares. I'm not clear on the RAB model myself so feel free to comment. Thanks.

This underlines my point. The main risk is regulator risk. They control the price at which Netlink trust can charge for access to residential broadband. This long term, you cannot assess any specific current method IMO. You can only try to guess at the philosophy behind the regulator and make a bet it stays consistent.

In my opinion, in line with modern practice, the regulator will want to make it economically viable for netlink trust to efficiently maintain the network (which is regarded as a core strategic pillar). This means that cost of capital has to come into play. The cost of capital is in turn influenced by the rate of inflation and current interest rates. It should take into account any incentive for necessary new capital expenditure to maintain non-obsolescence.

Also, if we are looking 15-30 years down the line, there will be a leverage effect from the deployment of IOT in every day life. Some of the IOT will go wireless (because they aren't inherently traffic intensive), but some may come down to Netlink trusts ducts and manholes. Which means the fee that service providers pay Netlink trust is supported by a bigger pie.

Actually, I have a question : Singtel, M1 etc have cell towers right? But the cell towers have to connect to the back bone somewhere. So whos wired connection do they use? I won't be surprised if SingTel has its own wired network to support this, but what about starhub/m1... ?

The backbone is either Singtel lease line or Net link NGNBN and of course some of their own cabling. Most will use both as a protection in case there is a downtime in one of them. 
I hope it drop somemore , hope to buy at 76cts!

[MrValue]

As for how dividends are going to be sustained, they will be funded by cash generated which will be more than accounting profits. What we have not discussed is the pricing, because this is controlled by MDA, and they are using the RAB model which allows Netlink to recover its costs + a WACC. So maybe 20-30 years later once Netlink has recovered all its costs from the initial deployment of the network, MDA may cut the pricing significantly (not considering the additional capex starting from today). But thats a discussion 20 years later anyway so who cares. I'm not clear on the RAB model myself so feel free to comment. Thanks.

This underlines my point. The main risk is regulator risk. They control the price at which Netlink trust can charge for access to residential broadband. This long term, you cannot assess any specific current method IMO. You can only try to guess at the philosophy behind the regulator and make a bet it stays consistent.

In my opinion, in line with modern practice, the regulator will want to make it economically viable for netlink trust to efficiently maintain the network (which is regarded as a core strategic pillar). This means that cost of capital has to come into play. The cost of capital is in turn influenced by the rate of inflation and current interest rates. It should take into account any incentive for necessary new capital expenditure to maintain non-obsolescence.

Also, if we are looking 15-30 years down the line, there will be a leverage effect from the deployment of IOT in every day life. Some of the IOT will go wireless (because they aren't inherently traffic intensive), but some may come down to Netlink trusts ducts and manholes. Which means the fee that service providers pay Netlink trust is supported by a bigger pie.

Under the RAB model, NLT is allowed to get a pre-tax return for their invested capital of 7%pa for the period 2018-2023, which has been worked out based on WACC. If the same model is used for subsequent periods (which we should expect so), then should interest rate moves up, WACC will also be adjusted upwards and hence the yield from NLT should also increase.
I take comfort in this inflation protection element over the longer term, which I feel has not been sufficiently appreciated by the market.

[pianist]

When is its first cash payout coming? Are they paying trustholders once or twice a year?

[karlmarx]

I read an article on TheEdge that described a new technology to transmit data. It is paywalled but I found a similar article on it. In short, it is trying to replace the fibre and radio medium of data transmission. The technology is still in its infancy, but (prospective) investors may want to consider the possible implications, especially if Netlink is considered as a long-term investment, amongst other issues.

"The average cost of transcontinental high bandwidth undersea cables ranges from over hundreds of millions to billions of dollars in capital expenditure, and tens of million dollars in annual maintenance. Existing wireless technologies have reached high levels of spectrum congestion leading to a limit on how much connectivity they can support. Transcelestial’s radical new approach is needed to overcome these issues and ensure global connectivity in the next couple of decades."


https://www.straitstimes.com/business/co...to-deliver

[chialc88]

空中数据中心 Outerspace Data Centre

[tanjm]

I read an article on TheEdge that described a new technology to transmit data. It is paywalled but I found a similar article on it. In short, it is trying to replace the fibre and radio medium of data transmission. The technology is still in its infancy, but (prospective) investors may want to consider the possible implications, especially if Netlink is considered as a long-term investment, amongst other issues.

"The average cost of transcontinental high bandwidth undersea cables ranges from over hundreds of millions to billions of dollars in capital expenditure, and tens of million dollars in annual maintenance. Existing wireless technologies have reached high levels of spectrum congestion leading to a limit on how much connectivity they can support. Transcelestial’s radical new approach is needed to overcome these issues and ensure global connectivity in the next couple of decades."


https://www.straitstimes.com/business/co...to-deliver

The article you referenced has many "ifs". If the laser can be reliable in any weather. If you can maintain consistent bandwidth with the satellite cover. If it can achieve 100Gbps. In any case, if you read the article properly, they are aiming at populations that do not have high bandwidth infrastructure already in place. The rest is marketing hyperbole.

A single optical fibre - the thickness of a human hair - now carries 1Gbps but that's merely a limitation of the network terminating equipment. As far as I know, if you install the right network equipment, you can push it to 10Gbps per fibre without replacing the fibre with existing production tech. In the laboratory, scientists have pushed the capacity to 255 Terabits per second per fibre.

In a highly dense environment like Singapore, you would very likely need hundreds or thousands of terabits/sec in dense city centers. Also, network bandwidth is like computing capacity. If you provide a higher capacity, there will be applications coming along to use it all up. Fibre will win in a arms race.

From a Science Fiction point of view, I would say that a competitor to fibre would be quantum entanglement. This would provide theoretically nearly infinite, instantaneous capacity limited only by the physical network equipment. There are researchers working on that. It is impossible to predict.

In the nearer term, 5G has been quoted as a worry. Analysts appear to dismiss 5G, saying that 5G would still need cell towers to be connected to the fibre backbone. The question I'd like answered is: assuming that a significant number of people switch to 5G for their home connection bypassing home connected fibre, how does this impact netlinks revenue model even though it is still carried on its backbone. e.g. the telco now pays a fixed fee per connection to Netlink. The user switches to 5G. Do they keep the revenue the same, more, less? Depends on the cell tower revenue model - even if it is on a bandwith charge, it would have to be quite great to replace a fixed monthly charge that happens regardless of usage.

[tanjm]

I read an article on TheEdge that described a new technology to transmit data. It is paywalled but I found a similar article on it. In short, it is trying to replace the fibre and radio medium of data transmission. The technology is still in its infancy, but (prospective) investors may want to consider the possible implications, especially if Netlink is considered as a long-term investment, amongst other issues.

"The average cost of transcontinental high bandwidth undersea cables ranges from over hundreds of millions to billions of dollars in capital expenditure, and tens of million dollars in annual maintenance. Existing wireless technologies have reached high levels of spectrum congestion leading to a limit on how much connectivity they can support. Transcelestial’s radical new approach is needed to overcome these issues and ensure global connectivity in the next couple of decades."


https://www.straitstimes.com/business/co...to-deliver

The article you referenced has many "ifs". If the laser can be reliable in any weather. If you can maintain consistent bandwidth with the satellite cover. If it can achieve 100Gbps. In any case, if you read the article properly, they are aiming at populations that do not have high bandwidth infrastructure already in place. The rest is marketing hyperbole.

A single optical fibre - the thickness of a human hair - now carries 1Gbps but that's merely a limitation of the network terminating equipment. As far as I know, if you install the right network equipment, you can push it to 10Gbps per fibre without replacing the fibre with existing production tech. In the laboratory, scientists have pushed the capacity to 255 Terabits per second per fibre.

In a highly dense environment like Singapore, you would very likely need hundreds or thousands of terabits/sec in dense city centers. Also, network bandwidth is like computing capacity. If you provide a higher capacity, there will be applications coming along to use it all up. Fibre will win in a arms race.

From a Science Fiction point of view, I would say that a competitor to fibre would be quantum entanglement. This would provide theoretically nearly infinite, instantaneous capacity limited only by the physical network equipment. There are researchers working on that. It is impossible to predict.

In the nearer term, 5G has been quoted as a worry. Analysts appear to dismiss 5G, saying that 5G would still need cell towers to be connected to the fibre backbone. The question I'd like answered is: assuming that a significant number of people switch to 5G for their home connection bypassing home connected fibre, how does this impact netlinks revenue model even though it is still carried on its backbone. e.g. the telco now pays a fixed fee per connection to Netlink. The user switches to 5G. Do they keep the revenue the same, more, less? Depends on the cell tower revenue model - even if it is on a bandwith charge, it would have to be quite great to replace a fixed monthly charge that happens regardless of usage.

I just realised that 5G will need many many more cell base stations, which in turns means more connections to the backbone needed to be installed But again we need more information about how telcos are charged for their cell tower connections and the installation work.