NetLink NBN Trust’s IPO: 1 Weak Spot Investors Should Know

Singapore Telecommunications Limited‘s (SGX: Z74) associate, NetLink NBN Trust, kicked off its initial public offering (IPO) on Monday.

The IPO is set to be the largest IPO in Singapore since 2011 and the second largest in Asia this year, after Korea’s NetMarble Games. In a previous article, I discussed the potential growth  in NetLink NBN Trust’s largest business segment, residential connections. I also highlighted two key growth areas for the trust.

These are the potential upsides for NetLink NBN Trust. But every business has both strengths and weaknesses. Today, I will look into one weak spot in NetLink NBN Trust’s business.

The downside to regulations

For NetLink NBN Trust’s IPO, the business trust commissioned Media Partners Asia (MPA) to perform a SWOT analysis. MPA highlighted the following weakness at the business trust:

“NetLink Trust has not been able to comply with IMDA’s QoS Timeframe Standards and IMDA will continue to take enforcement actions against such further non-compliance.”

The Info-communications Media Development Authority (IMDA) regulates the performance of telecommunications services in Singapore. NetLink NBN Trust benefits from being the sole provider of a nationwide residential broadband network. But at the same time, IMDA sets out quality of service (QoS) standards that the business trust has to meet.

Source: NetLink NBN Trust IPO prospectus

Between May 2012 and September 2016, OpenNet and CityNet (both are a part of NetLink NBN Trust) were warned six times and fined seven times for their failure to comply with QoS standards.

How now, brown cow

MPA also highlighted the reason for the failures:

“MPA understands that the principal reasons for NetLink Trust’s inability to meet the standards were due to (i) delays in gaining necessary access to a premise and delays caused by third parties, (ii) inadequacy of spare fibre capacity due to end-users requesting for second fibre connections, including end-users switching between RSPs or “churn”, and (iii) general operational issues which may arise from time to time.”

It is worth noting that IMDA has issued a directive for NetLink NBN Trust to increase its spare fibre capacity to at least 50%. The business trust is committing capital expenditure for its fiscal year 2018 and 2019 to fulfil this requirement. MPA also reported:

“MPA understands that NetLink Trust is committed to improving the delivery of its services in order to meet its QoS Timeframe Standards, and regularly communicates with IMDA in relation to its efforts.”

The QoS standards are an ongoing requirement that NetLink NBN Trust has to fulfil. It is part and parcel of being in a regulated business.

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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.