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Unprecedented Demand For NextDC Centres

Australia | Feb 26 2018

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

Brokers hail a record first half and anticipate robust demand for NextDC's data centres will continue.

-Contracted utilisation up strongly, largely related to S2 pre-sold space
-Could be an attractive takeover target for large international peer
-Rising electricity costs could temper second half margins

 

By Eva Brocklehurst

Brokers were impressed with the first half results from NextDC ((NXT)) amid signs of robust demand. The result was solid across all areas, featuring strong revenue growth, solid pricing and margin expansion.

The company has upgraded guidance by only 3%, which implies softer second half earnings by Macquarie's calculations, as first half earnings of $33.6m are, at the mid point, 55% of the full year guided outcome.

Sales records were set in the first half and Morgans suggests it is entirely possible that this could be repeated in the second half. Moreover, even after bringing forward costs associated with growth projects into the second half the company has still been able to upgrade guidance.

Contracted utilisation as of December 2017 was 39.2MW, up 7.7MW. Of this increase, 5.4MW related to pre-sold space in Sydney's second data centre (S2), scheduled for completion in FY19. Customer numbers were up 25% and interconnections rose 36%.

Citi observes the company is not sacrificing price for volume, which bodes well for earnings growth. The broker also points out, while the outlook is most encouraging and constructive, large-scale deployment by clients takes time and patience is still required.

M1, S1 and B1 are effectively full and growth in FY19-20 will be largely driven by M2, Macquarie notes, given the delayed ramp up to operations at S2. Contracted utilisation at M2 the end of the first half was 0.3 MW of the 40 MW planned capacity, which signals no large deals have yet been signed.

In contrast, S2 has already received more pre-sales and only opens in the first half of FY19. Morgans was impressed by the pace at which S2 is being contracted, as already 18% is sold despite the centre not yet being built. The stock is a high-quality growth company but, after a strong rally in the share price, the broker moves to Hold from Add for now.

The stock is a multi-year story about structural change, UBS asserts and, while the share price has had a strong run, the positive upside risk suggests a Buy rating remains warranted. The broker is now more confident around the stability of earnings.

Following the capital raising in September, analysis suggests the company can fund, via debt, the remaining expansion of the M2, B2 and S2. Moreover, UBS does not believe increasing the supply of data centres will result in prices deflating over the next five years.

The broker estimates that less than 20% of the required capacity has shifted to outsourced data centres and the adoption of cloud technology is likely to increase this demand.

CLSA's concerns around pricing pressures were alleviated with the growth in annualised revenue per MW in the half, and this was mainly because of the shift to enterprise from wholesale customers.

Around 53% of the company's customers are enterprises and this is expected to continue because of the increasing adoption of hybrid cloud – where customers deploy their own private cloud in addition to the mainstream public cloud.

Further interconnections should also support higher prices in the medium term. The broker likes the stock, fundamentally, but finds there is insufficient upside to justify a Buy rating. CLSA, not one of the eight stockbrokers monitored daily on the FNArena database, has an Outperform rating and $7.55 target.

Canaccord Genuity, also not one of the eight, expects solid cash flow will be locked in over the next year and the new data centres that are ramping up should provide the momentum. Accordingly, the broker upgrades to Buy from Hold. Target is $7.40.

Target?

Over the long-term, Credit Suisse expects consolidation in the data centre space to accelerate as demand increasingly skews towards large cloud players. NextDC would be an obvious strategic target for a large international operator that is looking to expand its Australian/APAC footprint.

The broker does not believe interest from financial sponsors would be forthcoming, because of the development risk and the negative near-term cash flow.

Macquarie also suspects the potential for corporate activity could provide a floor beneath the share price, noting that the stock is trading at around a 70% premium to international peers on an FY18 and FY19 enterprise value/operating earnings (EBITDA) basis.

Power

Increased power costs are starting to flow through to larger wholesale customers and Macquarie suspects rising electricity costs and ramping up of the costs for the generation 2 centres will likely temper second half margins. The net impact of rising electricity costs was around 5% of total direct costs in the first half and this is expected to increase in the second half.

FNArena's database shows four Buy ratings and three Hold. The consensus target is $7.06, suggesting 1.9% upside to the last share price. This compares with $6.03 ahead of the results.

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