NextDC Pulls Ahead In Data Centre Potential

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NextDC has announced a capital raising to fund development of three new data centres, although brokers suggest patience is required to realise the opportunity.

-Capital raising supports the business outlook in the event equity markets turn jittery
-Plans for new centres signal strong belief in the growth profile of the industry
-Next catalyst is securing significant customers to create value
 

By Eva Brocklehurst

NextDC ((NXT)) has moved to its next stage of developments with plans to add three new data centres. The company has announced a $300m institutional placement as well as a share purchase plan.

Funds will be used to purchase land and build new data centre facilities in Perth (P2), Sydney (S3) and Melbourne (M3). In aggregate these data centres will take the company's planned capacity to 306 MW, from 126 MW currently.

The raising provides over $750m in liquidity and Credit Suisse notes the placement was done at no discount to the previous day's close, highlighting strong investor sentiment for the stock.

The broker views the S3 and M3 sites as "land bank" deals which increase options for the future, and add flexibility rather than genuine market capacity. Yet, this should help persuade new entrants from adding competition at the wholesale end of the market. Credit Suisse currently does not include any incremental value for S3 and M3.

The capital raising is a strong signal that the company believes in the growth profile of the industry and Citi suggests the additional capacity will provide the ability to take a portfolio approach to sales negotiations as larger, more meaningful sites give customers better visibility on larger contract amounts.

The broker agrees the plans send a message to customers and competitors alike that the company intends to deliver material capacity across a suite of assets. Citi forecasts global cloud revenue will double to US$200bn by 2020. Australia's public cloud services are expected to grow 36% to $5.4bn over 2017-19.

The broker does not envisage material oversupply is an issue for the short term yet concedes a pertinent question is: why now? NextDC has only recently opened its B2 and M2 assets, and S2 will open in September.

The reason, the company signalled in its briefing, is that demand is not linear. Demand from a single client today could be the same size as an entire generation 1 asset. With multiple assets to offer customers and hyper-scale customers in particular, this should increase traction for NextDC, in Citi's view.

RBC Capital Markets, not one of the eight stockbrokers monitored daily on the FNArena database, maintains an Outperform rating and increases its target to $8.50 from $8.00, doubting the market fully values the stock over the near term.

The broker agrees the size of the the company's planned facilities is driven by exponential growth, noting M1 and S1 projects appeared huge at the time and now seem quite small, and there is already evidence S2 was far too small at double the size of S1.

Unique Proposition

Morgans points to the ability to sell multiple concurrent data centres in each city as a unique sales proposition, albeit very capital intensive. Still, the capital raising places the company in a good position for the next few years and supports the business in the event that equity markets turn jittery. In the short term earnings are diluted while, in the medium term, profit potential is increased.

The broker maintains a Hold rating and believes the company now needs to secure significant customers to fill the generation 2 and 3 facilities and create further value. Morgans remains optimistic that market demand is accelerating, albeit cautious that filling out the new facilities quickly could be at the expense of returns on invested capital.

At current levels, investors are paying for several years of growth yet to come, and a change in sentiment or slowing market remain the key risks.

Exponential Growth

Industry feedback suggests to UBS that demand in Sydney is extremely strong and, while Melbourne and Perth are yet experience the same momentum from those deploying the cloud, this announcement materially de-risks the future growth opportunity.

The broker is a long-term believer in the significance of the increase in data usage over the next decade, through new technologies such as the cloud, AI and autonomous vehicles.

UBS has not included the new data centres or the capital raising in forecasts and calculates a capital expenditure cost of $2.1bn, incremental net present value of $1.5bn and the 5-year growth rate in EBITDA (operating earnings) increasing to 41% from 32%.

The database shows three Buy ratings and three Hold. The consensus target is $7.31, suggesting 3.7% upside to the last share price. Targets range from $6.32 (Macquarie, yet to comment on the raising) to $8.40 (Citi).

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