Australia | 10:00 AM
After three years of heavy data centre investment, NextDC has reached an inflection point from which earnings are set to accelerate.
- NextDC’s FY26 result beats across the board
- FY27 guidance also well ahead of consensus
- Funding data centre growth remains an area of concern
- Data centre worries have become political item in the US
By Greg Peel
NextDC ((NXT)) builds and operates data centres. The company was founded in May 2010 and was already listed on the ASX by December that year. At the time, there was much talk of “the cloud”, “big data” and “the internet of things”. Two words that were never heard were “artificial intelligence”.
But the times, they are a-changin’.
In December last year, NextDC signed a memorandum of understanding with OpenAI, best known as the creator of ChatGPT, to develop sovereign AI infrastructure in Australia, with a large AI campus and GPU (graphic processing unit) supercluster at the company's S7 site in Sydney.
NextDC labels its data centres as “S” for Sydney, “M” for Melbourne etc, and the number representing how many data centres came before it.
The company currently operates 17 data centres across Australia, in every capital city other than Hobart, and also in the Sunshine Coast, Port Hedland and Newman (in the Pilbara). It also has centres in New Zealand, Japan and Malaysia.
During three years of some $5bn worth of investment across FY24-26, NextDC's earnings showed little growth, but Morgan Stanley now sees a compound annual earnings growth rate of more than 50% over FY26-29 –- to reach nearly $1bn.
NextDC has reached an inflection point. Earnings are expected to quadruple from $249m in FY26 to reach that $1bn figure.
The Result
NextDC reported FY26 revenue of $497m, up 16% year on year, and 1% ahead of consensus. Earnings of $249m, up 15%, were 4% ahead.
FY27 earnings guidance is for $385m-$410m, up 55%-65% year on year, and 4%-11% above consensus.
This will nonetheless require greater investment. Capex guidance for FY27 of $5.25-5.75bn compares to prior consensus of $5.0bn.
NextDC ended FY26 (June) with 667MWs of computer power contracted and in July, this lifted to 740MW. Given progressive contract win announcements, this was in line with recent expectations, but meaningfully ahead of expectations earlier in the year.
The data centres operator reported $82m of profit in FY26. This was materially above expectations but included more than $100m of non-cash revaluation gains on the M3 and S4 sites which were revalued due to revised accounting standards.
The company sold three times more megawatts in FY26 than cumulative sales since inception.
“It was a big year”, notes Morgans.
It was indeed a significant year, which in UBS’ view, has not been correctly reflected in the share price.
FY26 saw a 3.5x increase in contracted megawatts (245MW to 740MW). The earnings profile has accelerated and has been de-risked, UBS notes, and there is a clear pathway to $1.1bn of earnings in FY30.
The company saw some 90MW of existing asset expansions and the 1.2GW M5 was added to land bank. Funding diversification came via an equity raise, bank debt and hybrid notes for a total of $9.75bn sourced, providing liquidity of $8.7bn.
Accounting Change
NextDC has moved to a “fair value” accounting system.
Higher capex has historically driven negative earnings revisions, Macquarie notes, but lease and investment property accounting mitigates this. With the majority of upcoming capex being driven by M3 and S4, now accounted for as investment properties, lower D&A on this capex drives earnings tailwinds.
This will be intensified by revaluations, which should drive deferred tax benefits in upcoming results. Lastly, capitalised interest will be structurally higher through this intensive capex period, reducing Net Finance expense in the P&L.
Combined, these are all positive for near term earnings per share, Macquarie notes, and mute the profound impact higher capex was having on the P&L. Despite this, there is little impact to cash flows, and therefore is a muted impact on Macquarie’s valuation.
Nevertheless, these changes are “optically” important, particularly for quant flows.
Revaluations will also help with debt covenants. Macquarie estimates NextDC is making circa 55% development margins at a 6%-6.25% capitalisation rate, notwithstanding cap rates will be highly dependent on customer mix.
Looking Ahead
NextDC is guiding to over $1bn in contracted earnings in FY30. Ord Minnett notes this is based on the company’s current billing utilisation of 175MW plus its forward order book of 565MW in binding contracted commitments, together being capable of generating in excess of $1bn of contracted earnings once the capacity is built.
FY27 underlying earnings guidance is for 60% year on year growth, 8% ahead of consensus. Higher FY27 earnings come from a faster than anticipated ramp-up of contracted megawatts.
Morgans thinks this is likely to remain a trend over the course of FY27 and beyond, subject to the supply chain and NextDC’s ability to build and activate faster.
Pleasingly for Morgans, FY27 guidance includes circa 200bps of net earnings margin expansion and shows an incremental operating margin of 67%, versus 59% in FY26.
The company ended FY26 with 175MW of billing and will end FY27 with 372MW of billing. This leaves a 368MW contracted which becomes billing between FY28 and FY30.
Management also noted that “Beyond the forward order book, customer options, reservations and sales pipeline are at record levels”.
As always, notes Citi, there was bullish management commentary on the demand pipeline and Citi does think S4 will likely be sold out in FY27, with further large contracts depending on development applications (DA).
In Citi’s view, the comment around shortening build times is quite positive given build-to-suit developments have not been NextDC's focus until recently.
While Citi sees the operational results as quite solid, this broker also believes a re-rate likely requires further clarity on future funding stack, especially for the hyperscale developments.
Funding
Data centres do not come cheap.
UBS’ analysis suggests NextDC’s funding covers FY27-28 capex, together with the $500m allocated to S5 at the recent equity raise. Further wins (115MW at S4), or accelerating the build profile (M4), could, in UBS’ view, require a re-shifting of funding structures (management noted potential for project finance for S4).
Signing a joint venture, as the company is looking to do, will be the biggest step change in funding and would likely drive a big re-rate. However, UBS also believes de-risking the construction and contracting phases of S4 will drive a better negotiation.
UBS wants to see S5 DA approval -- additional capacity is required in Sydney.
After raising nearly $10bn in debt and equity in FY26, NextDC ended the year with pro-forma liquidity of $8.7bn. Morgans notes this comfortably funds FY27 capex of $5.5bn.
However, investors have turned their attention towards FY28 capex and funding.
Management spoke to a capital recycling program around S4 and S7 and has undertaken significant work to ring-fence these at an asset or sub-asset level, ahead of a potential “JVCo” in 2027 or beyond.
Should this capital recycling program come to fruition in FY27, it should resolve short term funding concerns, Morgans suggests. Ring-fenced project level financing looks likely to come first, but more details are required.
Macquarie notes NextDC continues to deliver strong operating results, though the key driver of the share price is retaining the ability to self-fund.
Although there seems to be strong progress towards JVCo, NextDC also wants to obtain the best return on equity, which will be maximised the longer the assets are kept on the balance sheet.
Macquarie remains confident in a JVCo outcome within the next six to nine months.
The Backlash
Data centres are becoming increasingly unpopular across the globe, as the public comes to appreciate their excessive power and water consumption, and when located in suburban areas, noise pollution.
No more is the growing backlash evident than in the US.
The US currently has over 3,000 operational data centres, with more than 1,500 additional facilities planned or under development. But so angry are US voters, some Republican governors have completely backflipped on their prior data centre support, fearing a mid-term election wipeout (as if anything more was needed).
That same anger is increasingly prevalent in Australia.
NextDC says its operating data centres and the forward order book should be unaffected by the proposed NSW and Federal Government reforms on data centre grid connections and energy use, as they apply to new grid connections and those in planning approval stages.
Power arrangements are already in place across the company’s contracted capacity. However, NextDC will continue to work closely with customers around energy procurement and network connection.
As water as energy prices rise, data centres are receiving substantial, and in Morgans’ view, somewhat unwarranted negative publicity. NextDC has always paid for grid connections and data centres help defray fixed costs across a larger user base.
Morgans argues rising energy prices are more reflective of mix (declining base load coal and rising intermittent renewals). By definition, intermittent renewables need storage to make them a reliable supply.
This mix change is what is pushing prices higher, Morgans believes. Data centres need to better educate the community and manage such risks.
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