Small Caps | Oct 13 2011
– NEXTDC goes live with first data storage facility
– Sales momentum is picking up
– Strong earnings growth expected from FY14
– Moelis rates stock as a Buy
By Chris Shaw
Junior IT play NEXTDC ((NXT)) operates carrier and systems integrator neutral data centres through Australia and New Zealand. The product offering is a range of energy efficient and secure data centres, along with associated services provided to corporate, government and wholesale partners.
Yesterday NEXTDC announced a Certificate of Classification relating to its B1 facility had been received, allowing the data facility in Brisbane to go live. The should see pre-committed customers start to move into the space in the next few weeks according to management.
Sales momentum for NEXTDC has been picking up, as Moelis notes an update late in July indicated a qualified pipeline of sales of more than $50 million. This compares to more than $20 million as per an update in March of this year. With a sales team being put in plac,e Moelis expects this momentum will have been sustained.
In terms of the market in which NEXTDC operates, Moelis expects a supply-demand imbalance for data centre space for a number of years. This reflects the rapid growth in data traffic and the increases in power and cooling requirements of modern server technology.
The major uncertainty in the view of Moelis is the speed at which occupancy ramps up at NEXTDC's centres in the major capitals. Expectations are the Melbourne, Canberra, Perth and Sydney centres will be rolled out and essentially be fully occupied by the end of FY14, at an average rate of around $3,600/kW/square metre.
Moelis sees scope for a careful approach to filling the data centres to be adopted, causing a slower ramp-up in occupancy levels. Such an approach would also facilitate additional revenue from cross-connects, though this implies some upside as the current forecasts from Moelis don't include any assumptions for cross-connects.
In terms of funding growth plans, Moelis doesn't see any significant issues given a recent $50 million equity issue lifted cash balance to around $90 million. As well, a Capital Recycling Program could generate around $110 million from the sale and leaseback of facilities in Brisbane, Melbourne, Perth and Sydney over the next three years according to Moelis.
A full utilisation of NEXTDC's available power of 33.25MW and technical space of 17,800 square metres should generate $60 million in EBITDA (earnings before interest, tax, depreciation and amortisation). This could be achieved by 2015, the analysts sugest.
If so, this supports a discounted cash flow valuation of $2.60 on Moelis's estimates, though the turning of a net profit is not likely prior to FY13. Earnings growth should then be strong, as Moelis is forecasting earnings per share (EPS) of minus 1c in FY12, 0.4c in FY13 and then 14.6c in FY14. No dividends are expected through FY14.
A market capitalisation of a little less than $250 million means little coverage of NEXTDC, the FNArena database showing only RBS Australia covers the stock. By way of comparison with the numbers of Moelis, RBS is forecasting EPS of minus 5.8c in FY12 then 0.2c in FY13.
Given the lack of earnings medium-term, Moelis expects news of new contracts and sales will be the key driver of the share price over the coming year. Moelis continues to see value and so rates NEXTDC as a Buy, which matches the rating of RBS. Price targets show some spread, as while Moelis has a target of $2.00 the target of RBS is set at $2.44.
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