In a Monday report, analyst Sachin Mittal says, “NetLink is trading at 5.8% yield, compared to an average yield of 6.2% offered by large-cap industrial S-REITs. We argue that Netlink should trade at 80-100 basis points (bps) lower yield than industrial S-REITs’ as Netlink’s distributions are largely independent of the economic cycle due to the regulated nature of its business; Netlink’s asset life is much longer as it incurs annual capex to replenish its depreciated asset base, and Netlink’s gearing is less than half of S-REITs’ with ample debt headroom to fund future growth.”
The analyst benchmarks Netlink’s yield against industrial S-REITs whose asset life is 40-50 years. Netlink, on the other hand, incurs an annual capex of $50-60 million to replenish its depreciated asset base, leading to a very long asset life.
Currently, the trust’s net debt to EBITDA of less than 2 times, which implies ample room for raising cheap debt if needed. Regulated Asset Base (RAB) Trusts can lever up to 5 times easily, according to the analyst, implying that Netlink can easily raise up to $500 million in additional debt if required.
With this, the trust can use its debt headroom to invest in Smart Nation initiatives.
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However, in the case of continued market dislocation due to the Covid-19 outbreak, industrial S-REITs could decline to -2SD valuation in the worst-case scenario. This would imply industrial S-REITs’ average yield dropping to 7.7% from 6.2% currently, while share price is believe to shed some 20%.
“Given higher earnings resilience, lower gearing and longer asset life of NLT, we project Netlink to trade at 90bps of 6.8% under our bear case scenario,” says Mittal.
This translates into a bear-case price of 76 cents per share. This implies a downside risk of 10% including 5.8% yield.
