Tuesday, 18 July 2017

Netlink IPO

This has been the talk of the town for the past month or so, and literally (not really) everyone is applying for it, so it's not surprising that I did as well!

For those of you who do not know yet, the IPO was priced at S$0.81, at the lower end of the expected range.

I balloted for 6000 units and received 2000, as per the pre-decided allocation algorithm for the public offer as shown in the table below.

(source: SGX)

Basically if you are successful in your application ('by luck') you would be allocated a fixed number of units based on which 'range of units applied for' - column 1. E.g. if you applied for say 15,000 units, and your ballot was chosen, you would be issued 3000 shares.

Surprisingly there were 4 successful (and probably more who applied and were unsuccessful) applicants for > 2M units. Also, as shown in the table above, the "mode" - ie the "greatest number of applicants bidding within a range" was for the range of units between 100K - 199.9K units. Bigger players like these bidders may have felt that there was a decent chance of a successful ballot using the "ATM method" due to this IPO being a huge float. After all, the ATM method only costs S$2 as opposed to the placement method which costs 1%.

In addition, the placement shares was 1.8x subscribed (excluding connected persons) and the public offer was 5.1 times subscribed. I think that this is a pretty decent set of results considering the size of this offer.

I shan't bore anyone with the same details that most other bloggers have already covered about the financial statements and the forecasts, but I would just focus on my personal thoughts.

The safe but average yield
The yield is decent at the offer price of $0.81, being 5.43% (FY2017) and 5.73% (FY2018), but not fantastic, as most REITs would have a yield greater than this. However, I like the monopolistic nature of this business. Although one might argue that Netlink's operations are heavily subjected to regulation by the authorities (note: this occurs every 3-5 years), and hence have minimal room for growth, I believe that this is in fact a good thing. Being heavily regulated would mean that there is minimal room for competitors to thrive in, and even more so for potential new-entrants. This is evidenced by the $732 million grant issued by the government to Netlink in 2009 to build Singapore's NBN network.

The opportunity
Unknown to some, though the NBN network in singapore is "public-owned" (via ownership of shares in Singtel previously, and now "nearly-separated" into 2 entities via the IPO), the NBN network in some other countries is "state-owned". An example is Australia, where Singtel's subsidary Optus operates in. In these countries, just like in Singapore, the Telcos have to pay the NBN company (the "equivalent of netlink") the access fees to access the NBN. In my opinion, the chance to own a part of the backbone of a state offers significant safety and stability in this volatile market.

There have been a number of people who has comparing Netlink to Hutchinson Port Trust, which isn't exactly a good comparison except for the size of the IPO and the relatively-similar subscription rate. In my opinion, the previous time such an opportunity existed on the SGX was during the IPO of SMRT in year 2000. Similar to Netlink, SMRT had stability and a good infrastructure, but a low yield and potential for growth. I won't derail further, but in short, SMRT's IPO price was $0.61, and only gained a mere 0.1% (boring wasn't it?) on it's debut, and was later re-purchased by Temasek Holdings for $1.68.

Side note: Expensive but not very
The PE of this is understandably high (due to depreciation being factored in), hence excluding it from your calculations allows would allow you to appreciate it's cash generating ability better. This has already been mentioned in several articles before so I would not be discussing this here, and I've just included this in case any of you have not come across the idea yet.

In summary, there is a reasonable chance that the share price of this may stagnate, and over the next few months/years I would probably be looking out for any opportunities to purchase more units, as I'm prepared to hold it as part of my long term portfolio. (unless there are some unexpected spikes to potentially gain from!)

Good luck everyone.


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