Monday, November 4, 2019

Netlink NBN Trust - A Strong & Stable Investment

Netlink NBN Trust has gotten the attention of investors lately but I think its still early in its developments. I'm personally invested in this stock which I believed will do well in the next 2-3 years. They also just reported their financial results for Q2 and 1H FY2020 where we saw revenue and profit after tax increased by 5.3% and 17% respectively.

Background of Netlink NBN Trust

Netlink NBN Trust is not your typical limelight stock like REITs which owns properties where we can see the physical infrastructure. Netlink's infrastructure is hidden mostly underground where they are in the fibre business making money from every residential fibre connections, non residential fibre connections and non building access points (NBAP).

Fibre is an important aspect in our world today. I was once a telecommunication engineer and I saw the growth of the fibre business to a huge extent when 4G was deployed. In today's context where we need to transmit large data through telecommunication networks, the fibre business will definitely keep growing. When 5G comes, this growth will explode and that is where I think Netlink NBN Trust will benefit greatly.

How their business make money?

To know if Netlink Trust is a good investment, we need to first understand where they make their money from. Basically, they generate revenue from 2 primarily revenue streams:
  1. one-off installation and/or patching charges (as applicable) for each termination point (upon the initial connection) or service activation
  2. a monthly recurring connection charge
Basically, they make money through charging one off charge and also a monthly recurring charge. This means everyone with a fibre connection is renting the fibre from them by paying a monthly rental fee.

The largest part of their revenue comes from residential fibre connections. This means you and I are both contributing to Netlink's revenue as long as you have fibre at home. Netlink currently has 1.41 residential connections. The second largest of their revenue comes from non residential fibre connections. They have 46,742 non-residential connections currently.

Here's an overview of Netlink NBN Trust's revenue streams:

One thing to take note of is that the prices of fibre connections and the recurring fees are regulated by IMDA under the Regulated Asset Base (RAB) model. This is effective from Jan 2018. During the last review, IMDA has set fibre connection prices such that Netlink will make a 7% pre-tax return on its past capital investments based on the RAB model. These prices will be reviewed every 5 years so the next review will probably be in 2022.

The next growth segment

Fibre has a lot to grow as we consume more data and especially when Singapore is moving towards becoming a smart nation. Being a smart nation, large data will be transmitted everywhere which means more fibre connections will be required.

We will see more CCTV systems, weather monitoring systems, autonomous vehicles and many more such services which requires more fibre connections. This will fall under their non building access points (NBAP) which makes up only 1.9% of their revenue streams currently.

Let me get a little technical to explain why more fibre connections will be needed in the future. In wireless technology, there are various frequencies which are used to transmit data through telecommunication networks. They can operate in 900MHz, 1800MHz, 2100MHz, 2800MHz etc. The lower the frequency, the longer the distance which data can be transmitted but the bandwidth will be lower. With higher frequency, the bandwidth is greatly enhanced but the distance which data can be transmitted is much shorter.

For 3G, it mostly uses 2100MHz where data can be transmitted at quite high speed with good distance. For 2G, it mostly uses 900MHz where distance is very good but speed is very low. For 4G, 2800MHz is used where the speed is much higher but distance is short. This explains why our 2G coverage was much better as compared to 3G or even 4G. To overcome the distance problem due to using higher frequencies, Telcos have to build more mobile base stations to enhance the coverage and still provide the speed to customers. Every mobile base station will need to be connected to fibre connection points which generates more revenue for Netlink Trust.

For 5G, IMDA released a factsheet on 5G public consultation 2019 which shows what frequency 5G will operate in. The frequency spectrum identified are 3.5GHz (3500MHz), 26GHz (26000MHz) and 28GHz (28000MHz). 5G uses this technology called millimetre wave or “mmWave” bands which brings ultra high speed to us. 5G is able to support 20 times faster speed as compared to the current 4G and also has the ability to support large-scale machine-type communications which will propel Singapore into a smart nation.

Now, knowing that 5G will use much higher frequency, the distance covered will be much shorter so more mobile base stations will have to be built and these base stations will most probably be built lower to the ground on lamp posts and streets. As mentioned above, each mobile base station will need a fibre connection so we will likely see a huge increase in NBAP connections revenue for Netlink when 5G starts rolling out. This will be in the next 2-3 years.

Here's a good overview of the 5G network set up to show there will be more NBAP connections:

Adapted from:
The red antennas you see above are the possible 5G base stations which will be setup. All of these connections will require fibre connections which will benefit Netlink Trust greatly.

Q2 and 1H FY2020

Even before 5G comes, Netlink Trust is already delivering a good set of results for Q2 FY20. Residential connection increased 2% which most probably come from migration of cable users to fibre and also new residential buildings coming up in Singapore. If you've read the news, you would have saw that Starhub is stopping its cable service and migrating all their customers to fibre. This is good for Netlink Trust.

Distribution income (Dividends) increased by 3.3% QoQ with current yield of about 5.3%. Dividends is expected to be stable as they have a predictable recurring income stream. With the next growth segment coming up, I believe Netlink Trust will continue to do well. The downside will be that the government revised its pricing model downwards but that should not happen for the time being as the next review will be in 2022.

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Wednesday, October 30, 2019

Using Dividends To Boost Savings Goals For Financial Freedom

I've not been blogging for quite some time again. Pardon me for going missing as life gets busy with more projects at work, preparing for wedding, renovation for new house next year and the hustle and bustle of life. Sometimes I've not been able to sleep well and even during holidays my mind can't feel rested.

In view of the busyness of life, I've set a goal earlier this year to create more passive income instead of active income. I realised time is limited and its impossible for me to create any more active income. Despite not much time spent on stocks investing this year, dividends still come in regularly. This is passive income in the making. The good thing is dividends help to boost my savings quite significantly.

Financial planning for financial freedom can be complicated and a daunting task for many who look to get out of the rat race. When can I stop working? How much should I save? What ROI should I get for my investment? These are common questions which all of us have. In this post, let me share an easy way to visualise and make it easy for us to achieve financial freedom. I will show you how to determine what amount to save, how to use dividends to boost your savings and achieve the desired amount for financial freedom.

Determine the amount to save

The first step to financial freedom is to set a goal on how much to save. Financial freedom is having the money to sustain your desired lifestyle indefinitely without having to work. The most popular formula is the 4% rule which is a retirement study published in 1998 by three professors from Trinity University in Texas. The study found that 4% is the safe withdrawal rule for a portfolio of stocks to generate dividends indefinitely. This means having 4% dividends from your stocks is more sustainable than having say 7% or 8% dividends especially when we do not want to take on so much risk in our later years.

Based on this 4% rule, if you save up 25 times of your desired annual spending, the likelihood of you depleting your capital is very low. This means, if you desire to spend $40,000 annually (avg $3,333 per month) during your retirement years, you'll need to save up $1 Million dollars.

Summary of amount to save based on desired monthly income during retirement:

Monthly spending desiredAmount to save up

Work towards your target amount

The next step is to work towards your target amount. If you target to save $1 Million, you can use various ways to reach that target. The first step is to determine how much to save annually to reach $1 Million by certain years. Assuming we want to save $1 Million in 20 years, how much do we need to save annually? Here's the answer:

$1 Million divided by 20 years = $50,000 annually

Now, saving $50,000 may be out of reach to many of us. If you earn $3,000 per month, your take home pay is $2,400. Even saving all of your salary without spending a single cent, you won't be able to save up $50,000 annually. Its time to re-strategise. 

In life, we must understand it is never a straight road. If we work backwards like this literally, we will be stressing ourselves too much at the start. When we are younger, naturally we will earn less money and thus its harder to have much savings. Nevertheless, it is still important to save up a significant sum of money when we are younger to let compounding takes it effect. 

Achieving $1 Million savings goal in 20 years with $4000/month income and $2800/month expenses

I have curated a possible scenario to achieve $1 Million savings goal in 20 years with still a decent amount of spending so as not to compromise our current lifestyle. You can adjust accordingly to your needs. 

The scenario is as below:
  • Must have $200,000 savings to start off
  • $4000 monthly salary
  • 3.5 months bonus
  • $2800 monthly expenses
  • Invest 80% of savings with 4% dividends

The end result is a whole set of numbers below:

YRNet worthMonthly SAL Annual SALBonusTotal incomeEXPDIVSAVSAV+DIVDiv%
1$200,000 $4,000 $38,400 $11,200 $49,600 $34,000 $6,400 $15,600 $22,000 4%
2$215,600 $4,120 $39,552 $11,536 $51,088 $34,000 $6,899 $17,088 $23,987 4%
3$239,587 $4,244 $40,739 $11,882 $52,621 $34,000 $7,667 $18,621 $26,287 4%
4$265,875 $4,371 $41,961 $12,239 $54,199 $34,000 $8,508 $20,199 $28,707 4%
5$294,582 $4,502 $43,220 $12,606 $55,825 $34,000 $9,427 $21,825 $31,252 4%
6$325,834 $4,637 $44,516 $12,984 $57,500 $34,000 $10,427 $23,500 $33,927 4%
7$359,760 $4,776 $45,852 $13,373 $59,225 $34,000 $11,512 $25,225 $36,737 4%
8$396,498 $4,919 $47,227 $13,775 $61,002 $34,000 $12,688 $27,002 $39,690 4%
9$436,187 $5,067 $48,644 $14,188 $62,832 $34,000 $13,958 $28,832 $42,790 4%
10$478,977 $5,219 $50,103 $14,613 $64,717 $34,000 $15,327 $30,717 $46,044 4%
11$525,021 $5,376 $51,606 $15,052 $66,658 $34,000 $16,801 $32,658 $49,459 4%
12$574,480 $5,537 $53,155 $15,503 $68,658 $34,000 $18,383 $34,658 $53,041 4%
13$627,522 $5,703 $54,749 $15,969 $70,718 $34,000 $20,081 $36,718 $56,798 4%
14$684,320 $5,874 $56,392 $16,448 $72,839 $34,000 $21,898 $38,839 $60,738 4%
15$745,057 $6,050 $58,083 $16,941 $75,024 $34,000 $23,842 $41,024 $64,866 4%
16$809,924 $6,232 $59,826 $17,449 $77,275 $34,000 $25,918 $43,275 $69,193 4%
17$879,116 $6,419 $61,621 $17,973 $79,593 $34,000 $28,132 $45,593 $73,725 4%
18$952,842 $6,611 $63,469 $18,512 $81,981 $34,000 $30,491 $47,981 $78,472 4%
19$1,031,314 $6,810 $65,373 $19,067 $84,441 $34,000 $33,002 $50,441 $83,443 4%
20$1,114,757 $7,014 $67,335 $19,639 $86,974 $34,000 $35,672 $52,974 $88,646 4%
21$1,203,403 $7,224 $69,355 $20,228 $89,583 $34,000 $38,509 $55,583 $94,092 4%
22$1,297,495 $7,441 $71,435 $20,835 $92,271 $34,000 $41,520 $58,271 $99,790 4%
23$1,397,285 $7,664 $73,578 $21,460 $95,039 $34,000 $44,713 $61,039 $105,752 4%
24$1,503,037 $7,894 $75,786 $22,104 $97,890 $34,000 $48,097 $63,890 $111,987 4%
25$1,615,024 $8,131 $78,059 $22,767 $100,827 $34,000 $51,681 $66,827 $118,507 4%
26$1,733,531 $8,375 $80,401 $23,450 $103,851 $34,000 $55,473 $69,851 $125,324 4%
27$1,858,856 $8,626 $82,813 $24,154 $106,967 $34,000 $59,483 $72,967 $132,450 4%
28$1,991,306 $8,885 $85,297 $24,878 $110,176 $34,000 $63,722 $76,176 $139,898 4%
29$2,131,204 $9,152 $87,856 $25,625 $113,481 $34,000 $68,199 $79,481 $147,680 4%

If you look at the above, $1 Million can be saved up in 19 years. $4,000 monthly salary with $2,800 monthly expenses and 4% dividends should be achievable for many people. Some of you may even earn more and can generate more dividends which you will be able to reach your target even earlier.

I would like to point out the significance of this scenario. If you look at the additional savings column, you will see that this person is able to save up quite a significant sum annually despite managing to save only 20% of salary at the beginning. Take note that for a $4000 monthly salary, the take home pay is only $3200 which is already factored in in the calculation. Spending $2800 out of the $3200 take home pay is quite a lot. However, adding on bonus and dividends generated from the initial savings of $200,000, this person still can save an impressive $22K annually.

Let's now dive deeper to the various components which makes this possible:
  1. Having $200K savings
  2. Earning at least $4000 monthly salary
  3. How to invest to get at least 4% dividend yield

How to achieve $200K savings?

There are many articles out there which talks about $100K savings by age 28 or 30 etc. This is an important milestone as it will set the tone for your savings habit. The first $100K is always the toughest but after that it gets easier somehow. This is probably because we have already built a savings habit and also we earn more income and invest more after we achieve $100K so the money gets compounded faster. 

To save $200K, I would think give yourself 10 years which is to save $20,000 annually. Many of us will be able to achieve $200K in less than 10 years as we will also get returns from investment while we save up. 

Earning at least $4000 monthly salary

Besides saving hard, income is also an important component in this financial freedom journey. If your income is too low, it is going to be very tough and a huge sacrifice to save up any significant savings. This is the reality of life. Therefore, using the above scenario, it is recommended to aim for at least a $4000 salary as we progress in our career. This should also come with good bonus of about 3.5 months else you should aim for a higher monthly salary. 

If you can earn higher salary, its good for you as you can spend more than other people and still achieve the same goals. However, its always important to keep track of your spending as it can go overboard easily sometimes. 

How to invest to get at least 4% dividend yield?

Investing is the next part of the plan. I would say getting 4% dividend yield is not a difficult task. Its a matter of investing in the right stocks. For my own investing, I don't usually use very complicated methods. In essence, investing is about investing in a company at good price and seeing that it has potential to do well. Reading of annual reports is important to know what is going on and a basic understanding of the industry you are investing into is also critical.

To invest in companies at a good price, we can use several valuation methods such as Price to Earnings (PE) ratio, Price to Book (PB) ratio, discounted cash flow model, discounted dividend model etc. You can read more on valuation methods in a previous post I wrote here.

To know if a company is good and if it has potential to do well, we can ask the following questions:
  • What is the business about?
  • Is the business expanding?
  • Is the industry the business is in doing well?
  • Who are the management?
  • Does the management have aligned interest with shareholders?
  • Revenue & Net profit increasing?
  • Cash Flow increasing?
  • Gross profit & Net profit increasing?
  • ROE increasing? (Management efficiency)
  • Debt to equity ratio? (Financial strength)
  • Dividends sustainable or growing?

To summarise, a financial freedom plan needs to be thought out carefully with the following steps:
  1. Determine how much you need to save - 25 times of your desired monthly spending
  2. Start saving - Work backwards to determine how much you should save annually
  3. Earn a decent salary 
  4. Target at least 4% dividend yield for your stocks investing
Visualisation is important to help us stay on track and also make any adjustment to our plan when necessary. Excel is a good tool to help visualise this plan. Save up $1 Million with the 4% rule and you can generate $3.3K+ per month out of this savings through dividends to achieve financial freedom. 

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Sunday, September 15, 2019

New Housing Grants 2019 - Up to $160,000 Grants At All Locations

HDB just announced a few days ago they will introduce the new Enhanced CPF Housing Grant (EHG) which will replace the additional housing grant (AHG) and special housing grant (SHG). The income ceiling has also increased from $12,000 to $14,000 for new and resale HDB purchases and $14,000 to $16,000 for EC purchases. Many more people will benefit in this latest roll out. Let me illustrate a few key points which will be more applicable to most of us.

More Grants for purchase of HDB flats in Mature Estates

Under the previous AHG and SHG scheme, only couples who has combined income of $5000 or less will get AHG. SHG is not applicable for flats in mature estates where couples with combined income of up to $8500 could get some grants.

Good news for those who are looking to get a BTO or resale flat in mature estates now. The EHG now gives out grants for combined income up to $9000 for first timer families and up to $4500 income for singles.

Check out the grants below:

Average Monthly Household Income* Over 12 MonthsEHG Amount
Not more than $1,500$80,000
$1,501 to $2,000$75,000
$2,001 to $2,500$70,000
$2,501 to $3,000$65,000
$3,001 to $3,500$60,000
$3,501 to $4,000$55,000
$4,001 to $4,500$50,000
$4,501 to $5,000$45,000
$5,001 to $5,500$40,000
$5,501 to $6,000$35,000
$6,001 to $6,500$30,000
$6,501 to $7,000$25,000
$7,001 to $7,500$20,000
$7,501 to $8,000$15,000
$8,001 to $8,500$10,000
$8,501 to $9,000$5,000
Source: HDB

The above grants apply to all flat types and at all locations regardless if its non mature or mature estates. As we can see, most couples who have combined income below $8000 will get at least $15,000 in grants even when they buy a 5 room flat or a flat in a mature estate. Previously, they get nothing under these conditions. 

One Condition - Flats must have lease remaining to cover until age 95

While the type of flats and locations are no longer factors which affect whether we get the grants, the only caveat is that we must buy flats that we can call home until age 95. This affects the subsidies for those who are considering buying resale flats. 

In simple terms, if you're 30 years old and buy a resale flat that has less than 65 years lease, you will not get the full grants under EHG. You will still be able to get the grants but it will be prorated based on the extent that the flat’s remaining lease can cover you until age 95. It means you will still get some grants but lesser. 

Grants for low income families

The grants for families with income of less than $1500 remains high at $80,000. Previously, if they buy a HDB flat in a non mature estate, they could get $40,000 AHG and $40,000 SHG. However, if they decide to stay near their parents who may be in a mature estate, they could only get $40,000 AHG but $0 SHG. Their total grants is only $40,000. 

Under the new EHG, if they buy a flat in a mature estate, they will still get $80,000 EHG as long as the remaining lease of the flat covers them until age 95. 

Grants for middle income families

Middle income families were known to be the most disadvantaged in terms of grants as they are not very poor but not very rich also. Under the previous scheme, a couple with combined income of $4900 and buys a flat in a mature estate will get only $5000 under AHG. They will not qualify for SHG. 

Under the new EHG, the same couple who buys a flat in a mature estate will get additional $40,000 in subsidies. In total, they will get $45,000 in grants under EHG as long as the remaining lease of the flat covers them until age 95. 

Up to $160,000 grant for resale HDB flats - For first timer

Those first timer who are buying resale HDB flats in non mature and mature estates will be really happy to hear that they can get up to $160,000 grants. For the maximum grant, you need to fulfill the following criteria:
  1. Buying 2- to 4-room Resale Flat ($50,000 family grant)
  2. To live with parents/ child ($30,000 proximity housing grant)
  3. Have income of not more than $1500 ($80,000 EHG)
$50,000 + $30,000 + $80,000 = $160,000

While most of us may not meet the criteria above to get the full $160,000 grant for resale flats purchase, we might meet the below criteria to get $100,000 grant:
  1. Buying 2- to 4-room Resale Flat ($50,000 family grant)
  2. To live within 4km of parents/child ($20,000 proximity housing grant)
  3. Have income of $6,001 to $6,500 ($30,000 EHG)
$50,000 + $20,000 + $30,000 = $100,000 grants. 

This $100K grant is still quite substantial for a middle income couple looking to buy resale flats living near their parents regardless of location. However, don't forget the remaining lease of the flat must cover until age 95. Under previous scheme, they could only get $70,000 if they bought a flat living near their parents in a mature estate. 

The new housing grants scheme definitely makes it more flexible as they have totally removed the criteria for flat type and locations. Most people can definitely get more grants as compared to last time. You might want to check out the new enhanced housing grant to see if you are eligible. 

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