Australia | Aug 30 2021
This story features NEXTDC LIMITED. For more info SHARE ANALYSIS: NXT
Balancing prospective demand with the large expenditure and long timeframe required to build out data centres has meant, after a restrained FY21, NextDC has renewed plans for FY22
-Hyper-scale contracts to underpin the growth outlook
-Will demand in Sydney exceed supply?
-NextDC successfully certified data centres to highest standard
By Eva Brocklehurst
Having restrained expenditure over FY21, NextDC ((NXT)) is ramping up its expansion plans, continuing to finely tune the long timeframe and heightened expenditure required for data centres with an assessment of where demand is likely to emerge.
In FY22 data centre revenue is expected to be $285-295m and adjusted operating earnings (EBITDA) $160-165m. Revenue estimates are at the lower end of broker expectations, largely from fluctuations in energy prices, as energy costs are passed through to customers.
Ord Minnett reduces short-term forecasts to account for the slower ramping up of contracts but still emphasises the robust pipeline and the potential for positive news in the next 12 months. Historically, the broker points out, NextDC has been conservative with guidance and EBITDA could be readily achieved through the ramping up of existing contracts.
Credit Suisse takes into account the pulling forward of Melbourne's M3 completion, which will be slightly offset by lower FY23 billings across the remaining operation. Lower-than-expected revenue in FY21 combined with higher billing suggests some pricing pressure, yet the broker brushes this aside as the lower revenue outcome can be explained by lower power costs.
Goldman Sachs is "broadly comfortable" with forecasting 10-11% return on invested capital, while reducing underlying yield assumptions and anticipating a faster build out of hyper-scale.
Yet going forward, emerging contracts from cloud customers are likely to be higher yielding and support pricing, the broker adds. Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, retains a Buy rating with a $14.40 target.
Ord Minnett makes a marginal rating downgrade, to Accumulate from Buy, and expects more strong earnings growth and margin expansion as contracts are fulfilled. With Sydney's S3 (second half 22) and the M3 (FY23) nearing completion, the broker expects further hyper-scale contract gains in FY22 will underpin the medium-term growth outlook.
Planned capacity at M3 has increased to 150MW while land has been acquired for the long-term expansion of S4 to 300MW. Ord Minnett reduces short-term forecasts to account for the slower ramping up of contracts but still emphasises the robust pipeline and the potential for positive news in the next 12 months.
Historically, the broker points out, NextDC has been conservative with guidance and EBITDA could be readily achieved through the ramping up of existing contracts. Morgans also notes contracted megawatts that are yet to be billed could provide $200m in EBITDA in FY23 while cloud service provider (CSP) options could push this to $300m, assuming 100% is billed.
The broker also notes the company "flirted with the possibility" of a reported profit in the second half. As a result, Morgans expects a small profit in FY22 although this could easily turn to a loss depending on how quickly facilities come on board and depreciation occurs.
Capital expenditure was much lower than guided in FY21 at $301m and allowed the company to preserve cash flow, while higher capex guidance of $480-540m for FY22 suggests some catching up will occur.
While the capex delay can be viewed as a negative, as it implies slower development timelines, and the expectation that capital will be deployed again in FY22 suggests to Credit Suisse there is limited slippage. Nevertheless, the broker would not want further delays as this could affect billings forecasts.
Morgans attributes the delay simply to a timing issue but asserts that spending that much – $400m or more – in a single year is not an easy task. Moreover, as the broker warns, to help retain pricing power NextDC does not typically build large blocks of capacity on a speculative basis.
Typically, blocks of capacity are built only when customers have committed. Macquarie is concerned that, with S2 selling quickly and a large backlog in demand, amid delays to the ramping up of S3, a capacity shortage could eventuate.
The concern centres on Sydney, which is likely to be where demand exceeds supply over the longer term, and the broker acknowledges rapid advancements in technology mean the company does not want to build capacity too far ahead.
Digitisation requires significant infrastructure and NextDC is at the forefront of the trend. As a result, Morgans believes there is a high likelihood of CSP options being exercised which are, in aggregate, material at 54MW.
The exercise of some or all of these options underpin substantial potential in earnings. S4 is the new medium-term hyper-scale development opportunity and the broker believes the strength of customer demand and the funding structure present upside opportunities.
UBS remains focused on the medium-term outlook, estimating more than 90% of new billable megawatts in FY22 are already contracted. Hyper-scale demand is growing and should drive the new announcements over the next 12 months.
There is also potential for a joint venture project structure is similarly to the Equinix partnership with GIC, the broker suggests, and notes management has provided a list of potential partners.
The company has now successfully certified its suite of data centres with the highest standard "Certified Strategic". As Macquarie explains government agencies increasingly deal with cloud providers and the latter will not be able to buy capacity from data centres without security classification.
The broker also notes the company has made progress on ESG (environment, social, governance) in areas such as energy efficiency, renewable generation, carbon neutrality and waste minimisation.
FNArena's database has six Buy ratings and one Hold (Credit Suisse). The consensus target is $14.18, signalling 10% upside to the last share price.
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