Singapore Telecommunications is ready to divest its stake in NetLink NBN Trust, owner of the infrastructure that underpins the national fibre broadband network, in what could be the Lion City’s biggest initial public offering in five years.
Investment bankers started pre-deal investor education on Tuesday and a management roadshow is tentatively set to take place from June 27 to July 11, according to sources familiar with the situation. This will allow a trading debut at the end ofJuly if everything goes well.
It is no exaggeration to say that the IPO of NetLink Trust is the most anticipated deal for Singaporean bankers, and perhaps for the exchange too. That is mostly due to the sheer size of the offering, the biggest in Singapore for many years.
Syndicate analysts have suggested a fair value range of S$3.3 billion to S$3.9 billion ($2.4 billion to $2.8 billion) for NetLink Trust. At the insistence of regulators and the government, SingTel must divest at least 75% of its interest in the business trust. That suggests the IPO could raise at least $1.8 billion at the bottom end of the fair value range, before factoring in an IPO discount.
At $1.8 billion, NetLink Trust would rank as the sixth largest floatation in Singapore history and the largest since IHH Healthcare’s $2 billion listing in July 2012.
The sheer size of the NetLink Trust IPO stands in sharp contrast to Singapore Exchange’s slow deal flows in recent years, which have sparked criticism that SGX is losing its appeal as a regional fundraising hub. Proceeds from the deal alone will be close to Singapore’s IPO fundraising total from the last two years of $2.05 billion.
One source commented that a successful NetLink Trust IPO will not only increase liquidity in the local stock market but also boost confidence for companies looking to list in the city, including Garena and the HNA-AEP Reit.
For that reason, the deal itself will likely be consider “too big to fail” and bankers will do the utmost to ensure the deal gets across the finishing line.
Monopoly
Sources say SingTel will likely emphasise exclusivity as a key attraction for NetLink Trust, which has the only fibre network with nationwide residential coverage in Singapore. As of the end of March, the trust served 82% of the city’s residential broadband subscribers, or about 1.1 million homes.
Syndicate analysts expect the figure could rise to as high as 95% by 2020 since it is highly unlikely a competing network will emerge in the residential segment. That is also supported by the fact NetLink itself is a partially government-backed entity, in that it has received S$732 million of government grants to develop fibre network infrastructure for residential buildings.
In the financial year to March 2017, NetLink generated 61.5% of its revenue from one-off installation and monthly recurring connection charges for homes.
Besides the stable residential broadband business, the trust’s future cash flows and revenue are also highly predictable. Due to NetLink’s monopoly in the residential segment, its pre-tax income is capped at 7% of total capital deployed, according to Info-communications Media Development Authority, Singapore’s media regulator.
At the same time, its future capital expenditure highly correlates with development of new homes and is therefore transparent.
NetLink’s dominance in Singapore’s residential broadband market and the high visibility on income and dividends naturally makes it a defensive stock of the type favoured by some passive funds and private investors with little risk appetite.
Potential growth
On the back of stable income from the residential segment, NetLink will focus on gaining market share in the more lucrative enterprise market, which remains highly segregated and competitive due to the existence of multiple network providers.
Unlike in the residential market, NetLink does not have a government-mandated monopoly and faces completion from telecommunications service providers, some of which have their own fibre networks in non-residential buildings.
For instance, SingTel, StarHub and M1 have a combined fibre network of over 80,000 kilometres connected to corporate end-users, predominantly in the central business districts and major industrial parks.
As of the end of March, NetLink has a 31% market share in the non-residential market, which is a sharp contrast to its dominance in the residential segment.
However, there is a clear challenge for NetLink to expand its share of the non-residential market because its competitors are also its clients in the residential space. Of the 13 telecom service providers using NetLink’s residential network, eight have their own non-residential connections.
As such, NetLink’s biggest chance of growing its corporate business is likely the organic growth of the market itself. The company is expecting higher internet usage for the corporate segment with the government’s initiative to support start-ups and small- and medium-sized enterprises, thereby increasing the number of clients in the sector.
Those expectations also align with Singapore’s Smart Nation programme unveiled in late 2014, which is intended to introduce technology into everyday life. Among the various initiatives, NetLink will likely benefit most from the expansion of public wifi spots across the island, a programme known as Wireless@SG.
Janil Puthucheary, Singapore's minister of state for communications and information, said last year the city aimed to double the number of wifi hotpots to 20,000 by the end of next year.
In the best-case scenario, syndicate analysts expect NetLink’s market share in the corporate segment to grow to 37% by the end of 2020 from 31% last year.
Challenges
From a broader market perspective, NetLink will need extra work to entice investors at a time when they are increasing their exposure to riskier assets such as equities. That is emphasised by the Straits Times Index’s 12.2% gain year-to-date.
Meanwhile, the trust will also have to indirectly compete with Singapore-listed real estate investment trusts (S-Reits), which have found favour with investors and have generally been on a rising trend since the beginning of the year.
Year-to-date the SGX S-REIT Index has made a total return of 10.9% and shows no sign of losing steam despite rising US interest rates. The index posted a 4% return in the current quarter – already close to the 4.5% total return on investment over the last five years.
Sources said NetLink was projecting a dividend yield of 4.4% to 5.1% for the current financial year, which will make it one of the lowest yielding trusts in Singapore. Constituents of the SGX S-REIT Index offer an average dividend yield of 6%. Keppel Infrastructure Trust, Singapore’s largest infrastructure-focused business trust, yields 6.8%.
NetLink will invest S$1.1 billion in a 10.5% senior note and the interest payment will be used to partially fund its dividend payout, according to sources.
The IPO is sponsored by DBS, Morgan Stanley and UBS.
