When investors look for investments in the telecommunications (telco) space, they normally search for either Singapore Telecommunications Limited (SGX: Z74), also known as Singtel, or StarHub Limited (SGX: CC3). Both these telcos have been perceived as consistent dividend payers until the Singapore government decided to liberalise the telco space by allowing a fourth telco, TPG Telecom, to enter the market.
In fact, StarHub has slashed its dividend per share from a high of S$0.20 per year in 2016 to S$0.16 per year in 2017 and 2018, and now to just S$0.09 per year in 2019. The reasons for the significant cuts include weaker mobile and pay-TV revenue, lower average revenue per user (ARPU), declining operating profit, and stiffer competition.
Singtel has committed to a full-year dividend of 17.5 Singapore cents for FY 2019 and FY 2020, but seeing how the business is also under pressure, this dividend may have to be reduced from FY 2021 onwards.
Rather than investing in telcos to gain exposure to this sector, investors may want to consider investing in a fibre network owner instead: NetLink NBN Trust (SGX: CJLU).
Owner of the fibre network infrastructure
NetLink NBN Trust, or NetLink, designs, owns, builds, and operates the passive fibre network infrastructure that is the foundation of Singapore’s Next Generation Nationwide Broadband Network (NBN), over which ultra-high-speed internet access is delivered all over the island.
StarHub and Singtel are, in fact, customers of NetLink and are known as “requesting licensees” as they need to tap into NetLink’s fibre network in order to deliver internet access and connectivity to their end customers.
Stable and predictable revenue
The beauty of NetLink’s business model is that it generates a steady stream of revenue based on the number of connections the group makes to both residential and non-residential clients. As of 30 June 2019, NetLink had 1.38 million residential fibre connections and 46,548 non-residential connections.
Each connection has a fixed fee attached, and this makes NetLink’s revenue very predictable, while costs are also negligible as there is no need to maintain the underground fibre network.
This is unlike a telco’s business model, which has to manage fluctuating subscriber numbers, periodic churn, and declining Average Revenue Per User (ARPU). Telcos also need to spend significant sums of money on marketing and promotions in order to entice customers, and this spending eats into their operating profit and net profit.
Not impacted by changes in telco space
A final strong selling point for NetLink is that it is unaffected by competitive forces and regulatory changes within the telco space, as it is the vendor leasing out its fibre network to all of its requesting licensees, which include telcos and mobile virtual network operators (MVNO).
NetLink thus offers a great compelling investment thesis as it generates stable revenue and free cash flow. As the group is constituted as a business trust, it is allowed to pay out 100% of its cash available for distribution.
For FY 2019 (ended 31 March 2019), the group paid out a total of 4.88 Singapore cents per share. At the shares’ last traded price of S$0.88, this represents a trailing dividend yield of around 5.5%.