Netlink Trust ("NLT") announced on 27 November 2023 that the Infocomm Media Development Authority (“IMDA”) has completed their pricing review. I was shocked that the chargeable tariff has not increased at all despite inflationary pressures on labour costs, CAPEX and escalating financing charges. What was even more surprising was that the chargeable tariffs for Residential Connection and Non-Building Address Point got adjusted downwards (please click here for the YouTube Video version).
Basically, over the past 5 years, residential connections have grown from 1.2Mil to 1.5Mil which gives an compound annual growth rate ("CAGR") of 4.5% in terms of volume. Non-Building Address Points ("NBAP") has grown at an impressive 26.5%. Hence due to surge in volume economies of scale over total cost of operating the fibre network, this leads to a regulatory reduction in prices per connection.
Distribution yield of 6.43% not sustainable over longer term
At the price of S$0.815 per unit, this represented a distribution yield of 6.43%. However, note that part of the distribution is being financed from bank borrowings which is not ideal. From a free cashflow perspective, the sustainable distribution yield will be at a lower 4.95%. Given that money market funds with online brokers hover around 4% to 5%, a mere 4.95% distribution yield from investing in NLT equity is beginning to look like a really bad choice.
As aforesaid mentioned, I am extremely disappointed by the outcome of the IMDA pricing review. If one is sure of the continued compound annual growth story of new connections in driving revenue, then NLT seems to be still a good investment. Personally, I will not be adding on to my stakes in NLT as I think that the IMDA wants the shareholders to do charity work and the borrowings to fund dividend distribution is a strange concept to me. Nevertheless, I will still be keeping my minor stake in NLT for now.