NEXTDC Poised For Strong Revenue Growth

This story features NEXTDC LIMITED, and other companies. For more info SHARE ANALYSIS: NXT

-Client uptake bodes well
-Capital intensity tapering
-Risk of surpassing targets
 

By Eva Brocklehurst

Systems integrator and data centre provider, NEXTDC ((NXT)), is maturing as a business. The company now has five data centres and revenue grew substantially in FY14. FY15 revenue guidance is set at $51-55m, which signals 68-81% growth.

While the path to profitability is taking a little longer than Citi expected, the broker remains a supporter of the stock. FY15 should be a significant year as the company flexes its operating leverage. There are no oversupply issues in the data centre segment, while the company has the financial headroom to execute on its $35m capital expenditure plans. The company offers good visibility on recurring revenue, which underpins the broker's confidence. Citi does not envisage the company generating any material profit for a number of years, but client interest and uptake at its initial Brisbane asset, together with the foundation partners of its second centre in Melbourne, bodes well.

The proliferation of smart phones, tablets and associated data usage and storage underscores a robust outlook for NEXTDC. Citi retains a Buy rating, High Risk – with the High Risk maintained because of the infancy of the company's business model and the lack of profitability. The broker's price target is $3.23.

Growth in internet traffic is exponential and this augurs well for the stock, in Macquarie's opinion. The current share price represents a discount to the broker's valuation of the assets, which are assumed to take four years to reach full capacity. Specific milestones achieved in FY14 included the signing of over 300 unique customers and 722 service orders. Contracted customer utilisation has increased by 2.12MW. Data centre utilisation is at 30%. Macquarie notes annualised contracted recurring revenue is $41.7m. Based on the data and these contracts the broker forecasts break even for earnings as early as the first half FY15.

The broker observes that based on US experience, mature data centres generate very strong cash flow and high operating margins as initial capex requirements ease. The next step is new national agreements to build confidence, in order to support further expansion. This could be a slow process but provide a meaningful catalyst. Macquarie retains an Outperform rating and $2.20 target.

FY14 results were weaker than both Citi and Macquarie expected, largely because NEXTDC recapitalised its balance sheet with the sale of securities held in APDC, the raising of new equity and a five-year unsecured note offering. Capital intensity is tapering off and the company now has cash of $70m. Fitting out a data centre is capital intensive and requires significant expertise. Macquarie observes it can require more than twice the amount of investment compared with combined land and building value. The major cost for the company is power, which was around 13% of revenue in FY14. Based on a typical design, Macquarie observes the supply of 1MW of IT load to a data centre requires an average investment of $8-10m. Initial capacity in a data centre may cost around 20% over and above this figure.

Telstra ((TLS)) is a key partner, enabling customers to move critical IT into the data centres. Space is tailored to customers who want to complement Telstra's cloud access with equipment co-located in the a data centre in their region. Macquarie suspects NEXTDC is looking for a "white space" partner over FY15 to drive cross-connections and accelerate fit out. The broker's forecast of $60m revenue in FY15 takes into account a strong contribution from the Telstra agreement and a white space deal.

Morgans liked the news the company expects to be earnings positive in FY15. Moreover, sales momentum continues to improve and the first quarter of FY15 suggests guidance is conservative. NEXTDC has a relatively simple financial model and is at a key inflection point, with Morgans noting 75c of every $1 in new sales now contributes directly to earnings and cash flow. From here, the key issue is how long it will take the company to fill its footprint. Guidance is for new sales of 2.4-3.0MW in FY15, excluding any potential white space/wholesale deals. Given the momentum in FY14 this target is at risk of being surpassed. The numbers equate to a bullish outlook and Morgans retains an Add rating and $2.39 target.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms