Higher Revenue On The Way For Megaport

This story features MEGAPORT LIMITED. For more info SHARE ANALYSIS: MP1

Megaport maintained a focus in the September quarter on rolling out its latest product to new metro locations, providing the potential for materially higher revenue per customer.

-Pricing for the MCR 2.0 product is materially higher than core port fee
-Price increases sustained on the lower bandwidth ports
-Valuation could improve as more data centres come online and more revenue is derived per port
 

By Eva Brocklehurst

Sales momentum continues to build for Megaport ((MP1)), which provides a dense network platform for customers to connect to cloud and software-as-a-service platforms.

Despite a softer September quarter on some metrics, monthly recurring revenue rose 13% to $4.1m, driven by strong sales across the footprint. The company has maintained its focus on enabling more metro locations for the Megaport Cloud Router (MCR).

UBS has no significant concerns and believes the focus on rolling out MCR 2.0 to new metro locations should take priority over new data centre installations. This product provides the potential for materially higher revenue per customer and creates upside, in the broker's view, over the longer term.

The hard launch of the product occurred mid September with functionality in 19 metro locations, since increasing to 27 in October. Pricing for the product is materially higher than the core port fee.

Ord Minnett likes the stock because of the high-quality business model and exposure to a strong sector. The number of installations at data centres grew to 304 and connections grew to 535. While rolling out slowed in the quarter, brokers believe this was timing related.

Ord Minnett expects Megaport to add around 80 new installations over FY20. In early October the company has raised prices on its lower bandwidth 1G ports and reduced discounting. The monthly price increase to $500 from $350.

This is a smaller portion of the book but Ord Minnett expects it will provide a tailwind in the second quarter. UBS is comfortable regarding the structural shift to the cloud amid continued growth in Microsoft Azure and Amazon Web Services.

Morgans notes investor nervousness was centred on the fact the company had only installed equipment in four new data centres in the first quarter. Yet the broker points out the focus on new product installations, which should drive higher customer usage and revenue.

Moreover, traditional installations have varied from 4 to 36 per quarter so the roll-out curve is not smooth. The broker expects 380 installations in data centres by June 2020 and 470 by June 2021.

Morgans assesses there are several upside risks to medium term forecasts and valuation could be materially higher as more data centres are online and more revenue is derived per port. The short-term valuation driver continues to be strategic progress and sales.

Forecasts already assume further capital is required to rapidly expand the platform and Morgans is also not overly concerned about the competitive landscape. FNArena's database has three Buy ratings. The consensus target is $11.06, suggesting 14.8% upside to the last share price.

See also, Megaport Storming Ahead on July 24 2019.

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