article 3 months old

Megaport Storming Ahead

Small Caps | Jul 24 2019

Brokers are increasingly confident network services provider Megaport has a bright future after the June quarter revealed significant growth in revenue and installed locations.

-Significant revenue potential on view over the longer term
-Analysis on services and ports encouraging
-On current trajectory positive operating earnings may occur in FY22


By Eva Brocklehurst

Revenue is growing at a fast clip for network services provider Megaport ((MP1)) and brokers are confident the business has a profitable future. Of significance is the 300 physical data centre target, which the company reached recently, after adding 36 data centres in the June quarter.

Quarterly revenue was $10.9m, up 22%. Customer numbers increased by 9% and services by 11%. Revenue per data centre increased by 33%, an important metric, Canaccord Genuity suggests, because Megaport incurs fixed costs around leasing lines between data centres.

UBS asserts the compounding effect of stronger quarterly growth may have a material impact on the revenue potential over the longer term. The broker was hoping for more acceleration in the number of ports being added, given the investment in the sales force, although retains a belief there is ample upside potential.

While recognising that a lot of the current growth trajectory is priced in current levels, UBS still envisages value and maintains a Buy rating. The broker's target is raised to $8.65 from $6.25. Morgans also increases its target substantially, to $8.80 from $5.12, largely because forecasts now include four services per port, which is equivalent to 11 services per customer, according to the company's cohort analysis.

Canaccord Genuity is encouraged by the fact that despite adding new customers at a healthy rate, the number of ports per customer has remained relatively steady. This is because it would be reasonable to expect new customers to take a measured approach to the uptake of ports and other services, thereby potentially diluting the average.

Strong Outlook

UBS remains comfortable with the structural shift to the cloud that is supported by continued growth in Microsoft Azure and Amazon Web Services. The broker has surveyed 500 IT management executives, which revealed continued uptake of the cloud by new users, with 40-45% of respondents planning to use multiple cloud products. The company can achieve triple leverage at the revenue line, UBS adds, underpinning a forecast for a revenue compound growth rate of 47%.

Morgans assesses the increase in sales staff has been a good investment as record sales were added in the June quarter. The broker acknowledges Megaport needs to continue adding data centres and customers to fuel long-term growth but, in the medium term, the trajectory is driven more by existing customers taking more services.

This is an important metric, Morgans points out, as not only does it drive higher profitability but proves the company is adding significant value to the end consumer. The main risk to the share price, in the broker's opinion, relates to interest-rate increases, currently considered unlikely. Low rates are driving valuations on growth stocks although this could change over time.

Canaccord Genuity is also impressed with the operating metrics. The business exits FY19 with $3.6m in monthly recurring revenue, representing $43m in annual revenue. The broker accepts it may be overly ambitious to be stating that a business that is losing -$25m at the operating earnings (EBITDA) level in FY19 could have clarity regarding a turn to profitability.

However, Canaccord Genuity is confident the final results will show that revenue is growing at a must faster rate than costs. On the current trajectory, the broker expects the business to be positive in terms of operating earnings in FY22, increasing the target to $7 from $4 and maintaining a Hold rating.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms