Netlink Trust Finally Proved Itself- Free Cashflow Now Able to Sustain Dividends.

During my last review of Netlink Trust after its Q1 FY2020 results announcement (Netlink Trust- Stable Cash Cow Or Just Another Time Bomb Waiting To Explode?), I was disappointed that its free cashflow was insufficient to sustain dividends and seems to be using bank borrowings to fill the gap. But with the announcement of its Q2 FY2020 results, Netlink Trust has shown an amazing 17% increase in quarterly net profit relative to FY2019 on the back of the switch by many customers of Starhub from cable to fibre services. This is an awesome delivery of results considering the previous quarters of mediocre financial performance which lead to the prolong lackluster unit price since IPO. 

I have re-run the free cash flow testing using 3 scenarios:

1. The first one is using Q1 FY2020 net operating cashflow and CAPEX and then annualized the results to assess yearly impact on dividend sustainability.   There is a gap of <S$33.4Mil>.

2. The 2nd one is simply just using the latest Q2 FY2020 results for assessment. Due to the excellent performance in Q2 FY2020, there is now a surplus of +S$11.5 Mil in free cash-flow after extrapolation. If the good performance sustain, then the dividend yield can go as high as 5.5% based on the latest closing price of S$0.94 per unit. 

3. The 3rd scenario is  adding up Q1 and Q2 cash-flow projection and then extrapolating it for full year impact- something like a mix and match average. Such scenario does still show an annual deficit of <S$12.4Mil> which is significantly lesser than the <S$33.4Mil> in scenario 1. 

Which is the most likely scenario?

I believe that scenario 2 is the most likely scenario going forward based on actual results released. Q3 FY2020 results will be out soon and it should mirror the same excellent performance. Also, with the government award of 5G licenses, the telecos will be busy setting up new 5G base stations for connecting to Netlink's fibre network. There is thus potential new upsides over the next 2 years which will lead to increase in dividend distribution as well as capital growth. I have started to accumulate more units of Netlink Trust at the range of S$0.93 to S$0.94 in view of the good financial performance. 

Parting thoughts:

95% of what the eyes can see is real and 95% of what the ears can hear is illusion. Given the actual display of excellent financial performance, I decided to change my pessimistic view of Netlink Trust future prospects. If the upcoming Q3 FY2020 results continue to outshine the previous year, I think it is worthwhile then to take up additional stakes in Netlink Trust.