NextDC Expansion Moves Forward

This story features NEXTDC LIMITED. For more info SHARE ANALYSIS: NXT

-Reduction in capex estimate a key positive
-Likely to take 5-6 years to fill new capacity
-Less extra funds likely needed for new Sydney site
 

By Eva Brocklehurst

NextDC ((NXT)) has moved a step closer in the expansion of its data centre capacity in Brisbane and Melbourne, acquiring the land. Next comes the building of the two new centres.

Of note, the capital expenditure requirement of $160m is lower than the original estimate of $175-200m provided last November. Practical completion is expected by mid 2017 for both sites.

Brokers believe the company is well positioned for the high demand driven by the exponential growth in internet traffic and the trend towards outsourcing.

Both locations are positioned in close proximity to a major electricity sub station and public transport infrastructure. The Brisbane site in Fortitude Valley is near telco infrastructure and 2km from the existing centre. The Melbourne site is at Tullamarine, 19km from the existing site.

Credit Suisse lauds the reduction in capex estimates as it decreases the full fit-out capital base by 8.0% and allows a comparable return with a lower price. The likelihood of a further equity raising is also reduced for future expansions.

Moreover, starting the development sooner rather than later reduces the risk of development delays affecting FY18 forecasts. Citi is also cautious on this front, believing the main risk is the timely delivery of the finished data centres.

On this subject, the broker notes the rhetoric has changed, with the company now expecting completion towards the end of the second half of FY17 rather than during the half. Otherwise, the broker retains a positive view on the stock.

Macquarie estimates the two new facilities will take 5-6 years to fill and achieve full capacity. Given they are signficantly bigger, Macquarie expects this to allow for larger white space clients which will be attracted to the company’s decision to own land and buildings outright, providing the certainty of available tier 3 MW capacity.

The original Melbourne (15MW) and Sydney (14MW) facilities are tracking to full capacity within four years. Hence, the broker's estimates for 5-6 years for the larger sites.

Late last year the company finalised $220m in funding for the projects, including $100m in unsecured notes. Outstanding notes raised are callable in December and Macquarie suggests this will be an opportunity to recapitalise at more favourable rates.

Credit Suisse expects the company to build its Sydney extension in FY18 and now estimates this will only require additional capital of $55-70m which, if debt funded, could imply peak a debt/earnings ratio of 3.2-3.4. The broker expects that, as the stock matures and becomes an infrastructure-type player its multiple will expand.

Coincidentally, NZ infrastructure business, Infratil, has taken a 48% stake in the Canberra data centre. Credit Suisse observes the transaction values the equity in the centre at $793m and implies a 21.5x enterprise value/earnings run rate.

This allows analysis on the subject of multiple expansion in NextDC's context, as the Canberra centre is a more mature asset with higher utilisation, a smaller development component and lower growth.

The broker's forecasts estimate NextDC's utilisation during FY20 at 71% with a two-year forward earnings growth rate of 16%. While acknowledging its analysis is crude, Credit Suisse calculates this returns a share price of $5.44, offering significant upside should NextDC mature as forecast.

There are six Buy ratings on FNArena's database and one Hold (Ord Minnett). The consensus target is $3.24, suggesting 4.5% upside to the last share price.
 

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