A Bright Future Beckons For Megaport

Small Caps | Apr 07 2020

The future of cloud services remains bright and despite the current lock-downs across the globe, Megaport has the solutions to increasingly connect businesses and individuals remotely.

-Port connections and incremental recurring revenue accelerate
-Cash in hand considered adequate
-Post crisis consumption of cloud services expected to escalate

 

By Eva Brocklehurst

The surge in working from home as a result of the coronavirus crisis has meant Megaport ((MP1)) has benefited from an increase in connections via virtual desktop infrastructure and cloud-based applications. Telecommunications companies and data centres are typically considered critical infrastructure and remain in "safe mode" operations despite the lock-downs.

In its third quarter update the company achieved the acceleration in uptake that UBS was looking for, particularly in terms of the number of ports added and the incremental monthly recurring revenue.

Port and services sales accelerated by 11% and 12% respectively in the the third quarter. A weaker Australian dollar also provide benefits as around 60% of revenues are generated offshore. Third quarter revenue grew 10% to $15.2m.

The business is now moving closer to a maiden positive operating earnings outcome, expected in the fourth quarter of FY21. This is perceived as a major turning point by UBS and, with growth momentum accelerating, the broker's rating is upgraded to Buy from Neutral.

The broker recognises the current market volatility and the flight-to-quality that has underpinned the share price but considers any near-term weakness remains a good buying opportunity.

Goldman Sachs agrees there is a defensive earnings outlook relative to other companies under its coverage and Megaport is on track to achieve FY20 revenue forecasts. Still, the broker, not one of the seven monitored daily on the FNArena database, retains a Neutral rating and $10.85 target, believing the earnings and balance sheet are reflected in the current valuation.

The broker believes the company's solution is relevant for corporates that are likely to be accelerating the migration of infrastructure to the cloud. Ord Minnett agrees and anticipates further opportunities after the crisis has passed.

Morgans points out Megaport had already employed mobile extensively as around 60% of its staff were already working remotely before the crisis. Hence, moving to 100% was relatively smooth.

Moreover, the broker notes, in February, Megaport flagged events in China and, concerned about potential delays in the supply chain, ordered networking equipment required to fill plans for 380 connections to data centres by June 2020.

The business is not yet generating cash so its balance sheet and access to capital remain the focus in the current climate. Morgans reports, at the end of February, there was more than $100m in cash which equates to around two years of funding based on the company's last quarterly cash burn rate.

Future In The Cloud

UBS is comfortable around expectations for the shift to the cloud amid continued growth in both Microsoft Azure and Amazon Web Services. The broker expects compound growth of 18% in 2017-21 for global public cloud business.

UBS has its own survey data which shows increasing expenditure from existing users on the cloud, along with 40-45% of respondents planning to use multiple cloud products. The broker believes an age is looming where data will dominate new technology and the company's software-defined-network provides the path for this data to move between the cloud and lower-tiered data centres.

Morgans also expects that the outcome of the coronavirus crisis will result in existing customers consuming more services and it may well be the tipping point whereby Megaport crosses into the mainstream, helping individuals with their network connections to the cloud and making remote access available to many other dedicated point-to-point solutions.

New customers are typically medium to large organisations with the ability to embrace technological improvements but Morgans is optimistic that Megaport's offering may become a mass market solution.

FNArena's database has two Buy ratings and one Hold (Ord Minnett). The consensus target is $11.98, suggesting 8.0% upside to the last share price.

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