Australia | Sep 01 2020
This story features NEXTDC LIMITED. For more info SHARE ANALYSIS: NXT
NextDC is one of the few businesses benefiting from accelerated demand resulting from the pandemic, although the longer-term outlook is also robust.
-Spike in activity triggers plans to upgrade M2 data centre
-Unique offering of earnings resilience and growth
-Refinancing of unsecured notes the next key event
By Eva Brocklehurst
NextDC ((NXT)) has a problem. A good problem, in that the company is hard pressed to keep up with demand for space at its data centres. Brokers suggest NextDC is one of the few businesses benefiting from accelerated demand stemming from the pandemic. NextDC experienced a record number of contract gains in Melbourne over FY20.
Historically, Melbourne was a much slower investment in terms of hyper-scale but a recent uptick in activity has triggered plans to upgrade M2 and, along with the start of the M3 development, this is a welcome sign.
Ord Minnett points out some of the latest contracts include options which could lead to an early commitment for third-generation data centres. The broker upgrades to Accumulate from Hold, adding M3 to its longer-term forecasts.
Canaccord Genuity agrees NextDC is among those business that are thriving in the current environment because of the demand for cloud services. This is not so much in evidence in the FY20 results but rather in the number of contracts that have been announced to the last six months.
Morgan Stanley considers the issue facing the company is one of internal capacity rather than either demand or capital. Demand has scaled up fast industry-wide and NextDC has credibility as a top supplier, taking market share. Still, the broker envisages a risk that NextDC may run out in S2 and M2 before the new data centres go live.
Goldman Sachs points out trends for revenue are constructive with FY21 revenue of $242-250m anticipated. However yields declined -4% in FY20 as a result of faster ramping up of lower-price hyper-scale S2 contracts and the timing of early stage hyper-scale deployment.
UBS assesses the recent re-rating is warranted and points out NextDC is one of the few companies setting guidance in the current environment, targeting 20-24% operating earnings growth. The main negative, and the broker's view, is that smaller sites such as C1 (Canberra) and P1 (Perth) are taking longer to fill, but this remains immaterial relative to the growth coming out of Sydney and Melbourne.
Morgans also upgrades, to Add from Hold. The broker points out there are not too many businesses that have a combination of earnings resilience and growth. One question being pondered is whether there is a short-term spike in cloud demand because of remote working or whether the working world has permanently changed.
The broker is betting on the latter. Catalysts relate to the potential for more material contracts in the pipeline and the major debt refinancing event before Christmas.
The company will shortly make a commitment to refinance a significant amount of debt to fund its capital program that is likely to accelerate now the M3 land has been acquired. An announcement is expected ahead of the redemption of floating notes in December.
Every megawatt of incremental capacity requires $8-10m in fit-out expenditure, which excludes building expenditure. The main issue, therefore, Morgan Stanley asserts, is how growth will be funded going forward. Hence, the broker finds the renegotiation of debt facilities, or an expansion, a major positive.
Canaccord Genuity also expects the refinancing of unsecured notes III could be the next key event. At 6.25% the interest payable on these notes is significantly above the rates on the IV series and replicating the terms of the latter could save the company substantial amount of money in interest.
While capital expenditure was higher than prior guidance in FY20 this stemmed from accelerated building completion and the purchase of the land in Melbourne for M3, although the company is yet to confirm the exact location for the new facility.
Macquarie acknowledges NextDC is an attractive exposure, despite its a premium valuation. Sydney's S3 will now ramp up faster, in the broker's view, and should reach 90% billing utilisation by FY27.
Relative to Credit Suisse estimates, the FY21 operating earnings outlook is lower, although this primarily reflects an almost full run-rate of operating expenditure being incurred at S2 and utilisation only running at 20MW by the end of the financial year. As a result, the broker expects operating leverage will emerge in future as utilisation ramps up.
FNArena's database has five Buy ratings and two Hold. The consensus target is $12.67, suggesting 2.3% upside to the last share price. Targets range from $10.25 (Citi) to $14.15 (UBS). Of the stockbrokers not monitored daily on the database, Goldman Sachs has a Buy rating and $13.20 target while Canaccord Genuity has a Buy rating and $13.00 target.
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