[Investing] IPO Review - Netlink NBN Trust

There is much hype about this IPO because firstly, it is going to raise $2.3 billion, the biggest since Hutchingson Port Holdings (IPO in 2011: US$1 , current price as of writing: $0.45), and is dubbed as one of the 'blockbuster' IPOs in 2017.

Netlink is not a stranger to household. They were formerly known as OpenNet. Our broadband is set up by them. They (probably) own the optic fibre network here.

A good resource of the 'boring' points are can be found here.

The salient points are:

• Each unit is going for S$0.82
• About 2.9 billion shares is going to be issued
• Total Market Capitalisation is about S$3B
• Average EPS is 1.5 cents
• Cash is S$92M, Debt is at S$1.6B
• Dividend Yield is about 5%
• Use of proceeds - 1) purchase Singtel's assets and 2) repayment of S$1.1B loan to Singtel

Normally, my analysis will cover FInancial Strength, Profitability and Sustainability. But I have many questions, and hence red flags, just by listing the points above, even if I have not read the prospectus.

A Very High P/E

Just from the points above, the P/E of the trust is going to be at 54x. One conventional way to look at P/E is that it is the number of years for our investment to break-even. In this case it will take 54years. I look at it's recipocal which is E/P, the earnings yield, it's going about 1.8%. That is, for every dollar invested in this trust, it accounts for 1.8% of the earnings.

The high P/E could also mean much hype or expectations for the trust.

To me anything that is greater than 30 is too high, although there's really no hard and fast rule for P/E.

Too Little Cash, Too Much Debt

As stated, there is only $92M of cash but $1.6B, or $1600M of debt that's almost 20x. Even if the proceeds from the IPO is used to pay $1.1B of it, there remains $0.5B, or $500M. It is still 5x of cash! 

From the EPS, I infer that there will be challenges repaying that debt just by the business operations, unless they grow there business, which is my next point.

Lack of Growth Plans

It seems that there are no growth plans (or maybe there is). It is stated that the 'fixed residential wired broadband household penetration stood at 88% as of Dec 2016'. I suppose there is still 12% potential. I did not see any other plans like R&D, or expansion overseas. 

Sustainability of Dividend 

I highly doubt the sustainabilty of the dividends at 5%. A 5% dividends  at S$0.80 translate to about $0.04. Recall that EPS is about 1.5 cents, thats S$0.015. I do not know where the trust is going to top up the money.

A Cash Bump for Singtel

It seems that most, if not all, of the proceeds are going to Singtel. Not only does Singtel receive money for the loan to the Netlink, but it is also able to 'dispose' of some of its assets for cash. If you ask me, Singtel seems to be a big winner here.

Conclusion

I believe the red flags I have listed are enough to deter me from participating from this IPO. I could still participate in this IPO, and make whatever earnings after it is launched, but I will not hold it for too long - not with a P/E that high and not when I cannot figure out how it is going to sustain the dividends. I am saying - there are other opportunities around. Remember that after 6 years, Hutchinson Port Holdings is now at 45% of its IPO value.

Other Reference:

1. http://www.theedgemarkets.com/article/blockbuster-listings-pipeline-singapore-2h17-deloitte
2. http://www.straitstimes.com/business/netlink-nbn-trust-set-to-be-biggest-ipo-in-singapore-in-six-years-with-pricing-at-81-cents
3. https://www.shareinvestor.com/fundamental/factsheet.html?counter=NS8U.SI

~Huat