Netlink Trust

[tanjm]

I think you are making many assumptions here. The most critical being that the interest rate portion of the WACC will drop by 25-40bp. I think it is perhaps just as likely to go up by the time of the review ending (and remember, it will consist of risk free and corporate credit spread).

Also, assuming 50/50 debt/equity, the cost of equity is equally important. Let's say for the current period, cost of equity is 10% and the interest rates used are 4% (corporate 10Y) for an average of 7%. So assuming cost of equity stays the same (believable due to lack of quality infrastructure investments in Asia), a 40bp drop in interest rates in the WACC calculation merely moves the WACC to 6.8%. Even a 70bp downward move, drops the WACC to 6.65%.

[tanjm]

And here’s the other side of the coin. If NetLink decides to lever up to “normal levels”, then in the scenario where interest rates drop, this is beneficial for the leverage.

[BlackCat]

Thanks Tanjm, I'm really looking for a way to see if there's any way the WACC could rise.

But I cant see it now....

• I haven't found any chart/table showing interest rates being higher (or even the same) now, than in 2013-2018.
  

• IMO, an equity risk premium target of 10% is really high these days.  Shareholders getting a 10% cashflow-from-ops?  It may be suitable for a risky company like SIA.  But not for a mandatory utility (like PUB or HDB) where the target is almost guaranteed.
  

The only way I could see WACC rising is if interest rates rise in the next 18 months.  Either growth normalises, or inflation becomes not "transitory". I think everything depends on this.

And here’s the other side of the coin. If NetLink decides to lever up to “normal levels”, then in the scenario where interest rates drop, this is beneficial for the leverage.

Hmm....they would still have the same business with the same equity issued, plus additional interest costs.  Unless they buyback shares.

Hi Shrivathsa,

For what it is worth, I think the market may be blase about the pricing review and focused on the yield.

However, that may or may not create a shock i.e. if the review is that WACC does not drop much and the dividend is maintained the price may actually increase due to certainty, hell breaks loose in varying levels if dividend is cut (depending on the cut), hard to predict the outcome or even estimate probability for each potential outcome, in a way, too difficult (at least for me) to think of a way to invest on this.

I agree, tough to estimate the odds.  I'm holding NLT now for a reasonable bond-like income.  But  tempted to sell as growth is limited and the change in WACC is a risk.  Tough finding anything else to buy right now.

[corydorus]

Why are we investing just based on WACC ???? Make sense ?

What happen the the end product, sustainability, moat, leverage, growth ....

[ghchua]

Hi BlackCat,

Change in WACC is a risk, but the bigger risk in my view for Infrastructure business trusts like Netlink Trust is actually acquisitions. One wrong move and it could be pretty fatal as infrastructure assets are usually big ticket items.

I remembered I made an investment in CitySpring many years back for its "stability" in distributions and backed by Temasek Holdings. One big move to acquire Basslink and a massive rights issue almost bought the trust down, and eventually it was merged into the current Keppel Infrastructure Trust.

I guess one should not look at business trusts as a "bond-like" income instrument. It never was and never will be. Business Trust as a structure is not included for CPF Investment Scheme. If it is as safe as a bond, surely CPF Board will allow investors to use CPF monies to invest in them.

If you look historically at business trusts listed on SGX to date, collectively as an asset, they have not done well as compared to the general market. Many have tanked, some had been delisted below IPO price and most have stayed under water.

[BlackCat]

Why are we investing just based on WACC ???? Make sense ?

What happen the the end product, sustainability, moat, leverage, growth ....

Actually yes.  For a regulated utility WACC is everything because the regulator sets revenues.  There are discussions about moat and technology in this thread from last year, nothing has changed.

Hi ghchua, thanks for sharing, I agree and am against their trust deed change to invest overseas.  I hope it is just management fantasy, not a plan.  IMO, NLT does not have the scale or expertise to buy overseas infrastructure (which would probably be cell towers), even as a minority partner.  They are not a GIC or Brookfield.

[ghchua]

Hi ghchua, thanks for sharing, I agree and am against their trust deed change to invest overseas.  I hope it is just management fantasy, not a plan.  IMO, NLT does not have the scale or expertise to buy overseas infrastructure (which would probably be cell towers), even as a minority partner.  They are not a GIC or Brookfield.

I thought CitySpring do not have the expertise to invest in Australia as they have only Singapore based assets before buying Basslink.

I also thought CitySpring do not have the scale but they bought Basslink at an enterprise value of S$1.5 billion.

Never say never.

[tanjm]

Before I start on the WACC discussion, I'd like to say that I really think the main risk at the moment is the risk that Netlink trust management will decide on a ill advised investment. I would rather they return capital steadily (and gradually increase their leverage ratio) by simply including a small return of capital in their dividends.

To address the WACC issue....

It is entirely possible that cost of equity is 10%.

The following study estimated a COE (for healthcare infrastructure) of between 12 and 15% (see box 5 on pg 22) for a number of developing markets, not counting a illiquidity premium. No doubt, Singapore is a better bet, but 10% is within the ballpark.
https://ppiaf.org/documents/5838/download

A number of factors go into a COE factor for an investor, but consider this. When you (Joe Public) invest in Netlink, would you say you have an expectation that you get a 7% (for example) total return, otherwise you might go somewhere? Then what if I told you there is no way to exit the investment within 10 years? Then what if you had a choice of investments, not just in the stock market, but in private equity or commercial real estate? Lastly, what if the issuer wants to attract you for the long term to keep investing and has a vested interest in the infrastructure entity's success?

Second, I can reverse engineer the likely COE used originally. If I assume a typical 50/50 debt/equity split, and interest rates of 4%, voila, the only way I get a WACC of 7% is if I put in a COE of 10% (simple math, with a 50/50 split, (10+4)/2 = 7)

For the regulator of a RAB model, it makes no sense that the net WACC would gyrate so violently. It scares off investors. Recall that a RAB model is supposed to strike a balance between sufficient return to investors (for a low volatility asset) and keeping the price low for consumers. The key word is "Balance".

Anyway, as I said, if I plug in a interest rate drop of 70bp, I get a modest decrease in WACC - implying at most a modest drop in revenue, offset by decreased interest rate costs on debt. The whole point of the RAB model is to give investors a steady platform to incentivize them to invest for lower volatility in real terms.

Honestly, I think the DBS analyst "estimate" of 5.4% WACC is pulled out of thin air. You should ask why no analyst bothers to show their detailed assumptions and calculations. You will notice that in public analyst reports in general, they very rarely go out on a limb and say something is deeply discounted and put a high target price. They'd rather put a small premium over the current market price and then reverse engineer their justification.

[corydorus]

Why are we investing just based on WACC ???? Make sense ?

What happen the the end product, sustainability, moat, leverage, growth ....

Actually yes.  For a regulated utility WACC is everything because the regulator sets revenues.  There are discussions about moat and technology in this thread from last year, nothing has changed.

Hi ghchua, thanks for sharing, I agree and am against their trust deed change to invest overseas.  I hope it is just management fantasy, not a plan.  IMO, NLT does not have the scale or expertise to buy overseas infrastructure (which would probably be cell towers), even as a minority partner.  They are not a GIC or Brookfield.

IIRC, there is also Depreciation and Opex factors that need to consider. ( Past 10 years ? ). The Cost of debt is tricky because it was within Singtel previously.

Another consideration which I am not sure will they consider for investor returns in term of current stock price.

[corydorus]

Need some help here. Anyone know what is the Beta of NLT ?
What is your reference to get the Beta value ?