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NetLink NBN Trust’s IPO: 1 High Growth Area Investors Should Not Miss

Singapore Telecommunication Limited ’s (SGX: Z74) associate, NetLink Trust, has filed its preliminary prospectus to list on the Singapore stock exchange as NetLink NBN Trust.

NetLink Trust has a history stretching back almost a decade in Singapore. We have looked at how the trust has built a wide network of fibre cable that reaches 1.1 million residential homes in Singapore. We have also picked up on how it turns this valuable network into a source of cash. In yesterday’s article , we looked the growth expectations for its most important business segment, namely, residential connections.

While the residential connection revenue is the most important business for NetLink Trust, there is one other area in its business that could show stronger growth.

Growth, growth, growth

Beyond the residential segment, NetLink Trust also has an obligation to fulfill for non-residential connections. The business trust is also required to wire up non-residential locations such as commercial buildings and offices.

In its IPO prospectus, the business trust said:

“In accordance with the terms of the Universal Service Obligation imposed under the Licensee’s FBO licence, the Trust Group is required to offer non-residential connections to all non-residential premises. The Trust Group’s network supported approximately 38,500 non-residential end-user connections as of 31 March 2017, representing an estimated market share of approximately 32% of the estimated 121,3004 corporate wired broadband connections.”

Unlike residential households, where NetLink Trust’s penetration is above 80% range, the business trust does not have the same competitive position in non-residential connections. Key competitors in this space include StarHub Ltd (SGX: CC3), and Singtel:

“In the non-residential and NBAP [non-building address point] segments, existing fibre network infrastructure providers such as Singtel and StarHub, and to a lesser degree M1 and SP Telecom, are competitors to NetLink Trust.”

In early May, Singapore Technologies Engineering Ltd (SGX: S63) snapped up a controlling stake in SP Telecommunications. So, the non-residential space is getting crowded. Despite the competition, NetLink Trust believes that it has the upper hand in the non-residential space:

“The Trustee-Manager believes one of the Trust Group’s competitive advantages in its non-residential business is its extensive nationwide network coverage, as compared to the networks of its competitors, which are concentrated in the CBD and large business parks. This also allows the Trust Group to access non-residential end-users across Singapore, in particular SMEs located outside the CBD, in a timely and cost efficient way.”

With that in mind, let’s look at the potential of the non-residential space.

Show me the growth

NetLink Trust cited a study from Media Partners Asia (MPA – commissioned by NetLink Trust) for projected growth in the non-residential market. This estimation is summarised in the graph below:

Source: NetLink Trust’s IPO prospectus

According to a MPA study, the non-residential wired broadband subscriptions are expected to grow at a compound annual growth rate (CAGR) of 6% between 2016 and 2021. Fibre subscriptions, which uses NetLink Trust’s network, is expected to grow at a faster CAGR of 9.9% over the same time frame. We should also add that the 9.9% CAGR growth at the non-residential space exceeds the residential connection’s projected CAGR growth of 6.5% per year.   

In all, MPA estimates that NetLink Trust will increase its market share in the non-residential sector to 37% by 2021.  

For the financial year ended 31 March 2015 (FY2015), NetLink Trust’s non-residential segment accounted for 4.8% of its total sales. By FY2017, the segment contributed 7% of its revenue. If NetLink Trust is able to deliver on the projections, we should expect the non-residential segment to be a bigger contributor in the future.

There’s one last thing …

Before we close the chapter on growth, there is one more high growth area that investors should not miss. Check in again for the next article.  

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.