Positives Stack Up For NextDC
FNArena News - November 11 2016
Positive news keeps coming in regard to data centre operator NextDC given leverage to the substantial growth in cloud computing.
-Strong upside envisaged if second stage data centres fill in similar fashion to the first
-Balance sheet capacity to handle growth without new equity
-Main risk to shares relates to the rate of sales
By Eva Brocklehurst
The news flow remains positive for data centre operator NextDC (NXT) amidst strong momentum in cloud computing. The company is leveraged to growth in these services, which are expected to grow as an industry at 12-14% per annum over the medium term.
RBC Capital Markets contemplates the potential upside to the share price in the event the company fills its second-stage data centres in a similar fashion to the first stage.
The broker calculates that if NextDC is able to secure major deals consistently over the next five years, both existing facilities and developments could be worth $5.70 a share, without any further growth. The broker, not one of the eight monitored daily on the FNArena database, maintains an Outperform rating and $5.00 target.
The company has made some comments indicating it has sized B2 (Brisbane), M2 (Melbourne) and S2 (Sydney) with a view of filling these in 5-6 years. This represents a similar time frame to B1, M1 and S1.
RBC Capital Markets envisages a longer time scale in its estimates (7-9.5 years) and, should the second facility fill times pan out the same as the first in each market, then this would indeed be bullish for the stock.
The broker also observes the company has the balance sheet capacity to handle this growth without new equity and ponders that were the stock to be treated as a real estate investment trust (REIT), its debt capacity could significantly increase.
RBC Capital Markets expects the company's financial profile to improve towards earnings margins above 60% and an ongoing return on invested capital above 11% in the longer term as the business matures and scales up.
The share price also, currently, represents a significant discount to peers, in the broker's view, especially considering it offers a substantial revenue growth profile over the next five years.
Back in September, the company won a contract which pushed its contracted utilisation for S1 to 82% and this triggered the expansion plans for S2. Total capacity will increase to 103MW by the first half of FY18, from 42MW.
UBS highlights that the average annual mega-watt level contracted has been 3.4MW for M1 and 3.8MW for S1 since each opened. Amid evidence that the transition to the cloud is accelerating, the broker is comfortable about the company's long-term structural drivers.
UBS also believes the company can fund its expansion without further equity raising over the next three years. The broker's analysis suggests the remaining roll out of M2, B2 an S2 can be funded by debt. Net debt/earnings peaks at 2.9 in FY18, with rapid de-leveraging envisaged thereafter.
Increasing supply from data centres is also unlikely to result in price deflation over the next five years, UBS believes. The broker estimates that less than 20% of the required capacity has shifted to outsourced data centres and the adoption of cloud technology is only likely to increase demand.
The risk profile has increased because of the significant development being undertaken but Deutsche Bank believes this is offset by the company's track record of execution. Contracted utilisation is now over 65% of existing assets. The broker envisages multiple growth drivers for the business, such as price discrimination and growth in high-margin cross connections.
Macquarie assumes the new Sydney site will be filled over a 7-8 year period. The broker cautions that near term earnings will be affected by the dilution from the recent capital raising and an increase in depreciation and interest expense charges.
Morgans is upbeat, noting that while the capital intensity of data centre building is very high, with the initial aspects of phase two now funded, there is limited operational risk. The broker believes the main risk to the share price, both on the upside and downside, relates to the rate of sales whether this plateaus, slows or accelerates.
Faster customer demand, in the form of racks and/or white space, would lead to share price appreciation because of a higher fill rate. Conversely, slower demand may disappoint relative to market expectations. The broker sticks with a Hold rating for now.
FNArena's database shows five Buy ratings and one Hold. The consensus target is $4.71, suggesting 35.8% upside to the last share price. Targets range from $4.43 to $4.90.
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