Supply Constraints FY23 Headwind for NextDC

Australia | Sep 06 2022

This story features NEXTDC LIMITED. For more info SHARE ANALYSIS: NXT

NextDC continues to meet or beat guidance, and targets further growth in the coming year despite supply chain issues impacting on billable capacity.

-NextDC delivered another beat to guidance with its full year result
-Capacity expansion should benefit customers by reducing lead times
-Hardware supply chain issues look to impact on the conversion of contracted work to billable capacity

By Danielle Austin

While data centres operator NextDC ((NXT)) retains its long visibility over contracted work, conversion of contracts to revenue is being delayed by ongoing supply issues, as constraints continue to impact on the availability of necessary hardware.

The company delivered 18% year-on-year revenue growth to $291m alongside 26% year-on-year earnings growth to $169m. Company management is now guiding to a further 17-22% revenue growth in the coming year to $340-355m, and a further 12-17% earnings growth to $190-198m.

NextDC develops and operates data centres, with a current nine operational data centres and a further two under development, offering the necessary space and security to clients to operate computing, network storage and IT infrastructure.

Analysts are largely in agreement that inflation is yet to present an issue for the company. Not only are most of the costs long-dated and fixed for the time being, but power cost protection built into contracts is also seeing the company pass through power cost inflation to customers. Some analysts anticipate higher electricity pricing to impact on margins in the coming year.

Positively for NextDC’s customers, the company added 18.2 megawatts of new capacity in the last year. Expansion at the Melbourne’s M2 data centre saw capacity increase 67%, while Sydney’s S3 is set to offer an initial 13.5 megawatts, with an additional 4.5 megawatts now expected in the first half of FY24.

With only 73% of installed capacity currently contracted, NextDC retains its highest inventory levels in several years, which should equate to shorter lead times for customers.

Supply constraints expected to impact, overseas acquisition remains on the cards

All seven of FNArena’s database brokers have updated since the company’s full year results release, with six of them equivalent Buy-rated and one equivalent Hold-rated. These brokers have an average target price of $12.76, with a range of $10.90 to $14.00.

Accounting for the impact of supply chain issues on contract fulfillment, Citi (Buy, target $12.90) lowered its earnings estimate for FY24 by -3%. The broker also raises concern as to whether ‘hyperscaler’ customers may be slowing contract deployments given current volatile market conditions, noting timing of hyperscale contract conversion remains a key risk to forecasts.

The Citi analysts highlighted while Sydney reported the strongest increase in bookings in the second half, they consider the demand environment in Melbourne to be stronger. It was noted that NextDC’s bringing forward and expansion of capacity in both its M2 and M3 data centres should help service stronger demand in Melbourne.

Macquarie (Outperform, target $12.60) anticipates translation of contracted to billable capacity may decline in the near-term as the company continues to be challenged by supply constraints, forecasting a decline in billable capacity as a percentage of contracted capacity to 85% in FY23, before recovery to 88%.

Despite this temporary setback, the broker highlights operational resilience to inflation and power pricing remains a driver of high earnings visibility. Macquarie also notes acquisition continues to offer potential for NextDC, both in Singapore and other areas of Asia, and anticipates further updates on overseas acquisition in the coming year.

Macquarie reduced its earnings forecast -13% for FY23, but lifted forecasts 35-83% in FY24-25, reflecting lower finance costs.

Outside of the brokers monitored daily by FNArena's Australian Broker Call Report, Goldman Sachs (Buy, target $14.30) and Wilsons (Overweight, target $11.55) also updated on the company.

Wilsons noted, given the long-dated nature of NextDC’s contracts, its results were largely confirmed more than twelve months ago and the company is confident in its forward guidance for the coming year for the same reason. Wilsons encouraged investors to look past current market downside, noting the slight disappointment in contracted utilisation comes down to a timing issue.

Goldman Sachs anticipates the company could pursue both organic and inorganic growth in China, given company commentary it remains interested in Global Switch. The broker described the FY22 result as solid, and guidance for growth in the coming year as positive.

The Goldman Sachs analysts highlighted a current lack of operating leverage reflects NextDC’s pricing power, and ability to pass through costs to customers.

The NextDC share price noticeably underperformed in August and FNArena's consensus price target of $12.75 suggests 29.5% upside potential from yesterday's closing share price.

Current consensus forecasts are for 11% EPS growth in FY23, followed by 72% growth in FY24.

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