Rudi's View | 10:00 AM
In Weekly Insights this week:
-Macquarie Technology's Integrated Data Centre Services
-FNArena Talks
By Rudi Filapek-Vandyck, Editor
Small cap stocks in the US are on their worst performance relative to large-cap stocks in over twenty years with the Russell2000 index only up 24% since the beginning of 2020.
The gap with the 60% in gains achieved by the S&P500 over that period is nothing short of enormous and will have caught many investors by surprise.
There are always exceptions, of course, but the underlying trend in Australia has been similar with share market momentum in particular favouring large cap banks, technology stalwarts and AI-beneficiaries.
The FNArena-Vested Equities All-Weather Model Portfolio has benefited through the likes of Wesfarmers ((WES)), Goodman Group ((GMG)), and TechnologyOne ((TNE)), among others, but also included are some smaller cap companies that have not been able to keep up.
Time to highlight one of recent Portfolio additions that might require some patience, and why this company was chosen in the first place.
Macquarie Technology's Integrated Data Centre Services
My first contact with what was then still called Macquarie Telecom was about twenty-five years ago. That infamous Nasdaq meltdown was still in full swing.
The then small-cap challenger telco had just issued a profit warning and my attempts to get hold of someone --anyone-- for a follow-up conversation over the phone amounted to nothing.
Clearly, there was no appetite to talk to the press given the market update was a negative for the share price.
A while later I received an invitation for an in-person visit to the company's data centre in the heart of Sydney's CBD.
Under the stewardship of two founding Tudehope brothers, Macquarie Telecom, now Macquarie Technology, has always had an integrated approach focused on achieving the highest rates of customer satisfaction possible. One might argue it's a feature that sticks with higher quality companies.
Something many investors in small cap companies very much like: both founders have been CEO and MD of the company since 1992.
Those investors that remained loyal to the company have enjoyed significant rewards, but equally important; this company has changed dramatically since then, and shareholders had to wait until 2014 before positive momentum got hold of the share price in a sustainable manner.
The business itself has changed dramatically. What was back then its main purpose of existence, and of corporate survival --telco services-- has become but a side-show today.
At its core, the integrated customer servicing approach has remained, and it is what makes this company fundamentally different from more glamorous data centres and AI exposures on the ASX, including Goodman Group, NextDC ((NXT)) and Megaport ((MP1)).
Today, Macquarie Technology sees itself as a diversified Australian digital infrastructure services provider operating across four inter-related segments: Data Centres, Cloud Services, Cybersecurity (Government), and Telecom. Its specific areas of focus are the Australian government and mid-to-small cap businesses across the country.
Similar as with Goodman Group, which also didn't start off as a dedicated builder of data centres for international clients, data centres have become the main focus for investors, and are now responsible for the future outlook and investment returns for the company.
Macquarie Technology currently has five Intellicentre facilities (three in Sydney and two in Canberra) with high security and certifications for government use.
The company's strategy revolves around integration of its own data centers to offer secure cloud and hosting solutions, with 42% of Australian Federal Government agencies using its services (hence the relatively strong Canberra footprint).
The Government division works with defense and intelligence agencies under high-security clearances and remains responsible for more than 50% of total revenues and some 46% of group earnings (EBITDA).
Similar as is the case for a high quality performer such as TechnologyOne ((TNE)), a high customer retention provides Macquarie Technology with opportunities for additional sales and services. Maybe this has provided the backbone for what has been a remarkable reliability and consistency in growth and profitability in recent years.
FY24 marked the company's tenth year of consecutive improvement in EBITDA. The first half of FY25, reported in February, marked its 20th straight half-year of EBITDA growth.
At the same time, this still is a relatively small-sized enterprise with a market cap of circa $1.6bn, annual sales of no more than $363m and FY24 earnings of $109m. Building additional data centres comes with a high cost. Capital expenditure reached almost 50% of total sales in FY21 and 40% of sales in FY24.
One added advantage is the telecom unit is a reliable generator of free cash flows which assist with carrying the burden of significant investments.
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