Singapore's Next Hot Dividend Stock?

Recently, one of my friends has asked me about my opinion regarding one of Singapore's hot dividend stocks, NetLink Trust. Here are my analysis and thoughts on the NetLink Trust (CJLU) stock. NetLink Trust is a relatively new dividend stock in Singapore that is gaining traction among investors due to its reliable and sustainable business model. The company is currently a monopoly in Singapore which designs, builds, owns, and operates the fibre network infrastructure of Singapore's Next Generation National Broadband Network (NBN). Fibre network infrastructure is required for almost every technology-associated process or gadget as it is directly responsible for broadband internet and TV. NetLink Trust's extensive network provides nationwide coverage for both residential and non-residential uses in Singapore. 

Monopolistic Competition

NetLink Trust is the sole appointed Network Company for Singapore's Next Generation NBN. This means they are essentially a monopoly company in the fibre network market in Singapore. They have no competitors and own the entire market share of the fibre network market. There are advantages and disadvantages to a monopolistic company. Some of the advantages include consistent demand for their product and economies of scale while disadvantages include reduced innovation and efficiency. The barrier to entry for the fibre network sector is very high, essentially deterring potential competitors from entering the market. The demand for NetLink Trust products will always be there as they are the sole supplier in the market. Moreover, the demand for their services will only keep increasing from here as Singapore works towards becoming a smart nation in the future. This further adds to its attractiveness and makes NetLink Trust a very stable dividend stock. This is evident from their increase in net profit and positive cash flow in their recent 2020 annual report. Overall, NetLink Trust will definitely benefit from being the sole supplier of fibre networks in Singapore in the future. 

Sustainable Dividends

NetLink Trust's dividend yield was 5.92% in 2018, 5.17% in 2019 and its estimated dividend yield for 2020 is around 5.3%. This is a pretty high and consistent dividend yield among Singapore dividend stocks. NetLink Trust's dividends are sustainable in the long run as they can reliably generate positive cash flow consistently. This is because the demand for their product and services will always be there and will only increase in the future. Furthermore, they can innovate to look for new ways to reduce their operating and installation costs to increase their positive cash flow. They have an impressive balance sheet where their total assets outweighed their total liabilities significantly. NetLink Trust has a P/B value of 1.3 at its current share price of $0.965 which indicates that is slightly overvalued at the moment. In general, NetLink Trust's dividend yield of 5.3% is pretty substantial and its dividends are definitely sustainable due to its ability to generate strong positive cash flow. 

Possible Risks

There are mainly 2 possible risks to NetLink Trust in the future. Firstly, a second company enters the fibre network market, essentially taking up some of the market shares of NetLink Trust. The Singapore government may even create a second public company to compete with NetLink Trust if they deem that the monopolistic company is no longer beneficial for consumers or they feel that increased market competition would lead to better innovation and progress for Singapore. This scenario would significantly decrease the demand for NetLink Trust's products and services, causing it to lose large amounts of profits rapidly. The second possible risk would be the development of new technology to replace the fibre network in the future. This is a huge risk associated with any technology-related product or service. For example, there could be a new technology that could replace fibre network products in the future, rendering fibre network redundant. This has happened multiple times to technology-related products in the past (a classic example is how the release of Apple's iPhone essentially KILLED the demand for Blackberry's phones). However, these 2 risks are only potential risks or setbacks that NetLink Trust may face in the long term. 

 

Verdict

In conclusion, I personally feel that NetLink Trust is a good dividend stock to own given its monopolistic competition and extremely sustainable dividends. However, I feel that it is currently too expensive at its given price of $0.965 (P/B of 1.4). One thing to look out for is the development of possible risks to NetLink Trust in the future such as a second company entering the market or technology that replaces fibre network (albeit this is an unlikely scenario that would only occur a few years later).  

You can read more about NetLink Trust's 2020 annual report here.

What are your thoughts on NetLink Trust?