NextDC Outperforming Expectations

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

-Upgrade cycle approaches
-Interconnections grow rapidly
-Several positive trends converging
 

By Eva Brocklehurst

NextDC ((NXT)) is moving from strength to strength. The systems integrator and data centre provider now expects to be earnings positive in the first half of FY15, six months ahead of schedule.

The small upgrade to the outlook represents a critical turning point for Morgans. The broker expects NextDC to reveal a $250,000 profit in the first half. Sales for FY15 to November 12 were 1.2MW and the company has sold 13.1MW for the year to date, of a 35.25MW total. Sales guidance has not been upgraded but looks very achievable to Morgans. The broker is confident the stock is entering an upgrade cycle as sales accelerate, with the cloud computing platform from a major customer recently going live. A profit will signal the company can generate capital and also broadens the potential investor base.

Over the first four months of the current financial year the company added 55 new customers, an 18% increase on the prior corresponding period while interconnections grew rapidly too, up 41%. Interconnections are a high margin source of additional revenue. Macquarie expects a strong contribution from the Telstra ((TLS)) channel agreement in the second half and further upside from the recent launch of Microsoft Azure The broker also hails attainment of the profitability milestone and retains an Outperform rating.

Moelis rates the stock a Buy as well, with a $2.30 target. The broker believes the update and confirmation of revenue guidance, between $51m and $55m, supports the long-term value proposition. This is also underpinned by a defensive quality to earnings and operational leverage that can be achieved from a fixed cost base.

Management may have left FY15 guidance for revenue and fixed costs unchanged at the AGM update, but UBS suspects this is a conservative tack. The broker recognises it may be early in the year but is confident enough to lift FY15 its revenue forecast to $55.3m, at the high end of guidance, and raise its earnings forecast to $4m from $1.8m. UBS continues to model profitability by FY17 and positive equity free cash flow by FY18. Support for investing in data centres is driven by a number of trends that the broker envisages will continue. These include growth in data centre-based IP traffic, outsourcing and consolidation of smaller legacy centres and increasing power and cooling requirements that are difficult to maintain in-house. Moreover, cloud technology is maturing and the importance of interconnectivity, which can be established within neutral data centres, is growing.

NextDC's strength lies in it being one of the largest neutral data centre operators in Australia and the only one with a national footprint. FNArena's database contains four Buy ratings. The consensus target is $2.58, suggesting 23.4% upside to the last share price. Targets range from $2.20 to $3.23.
 

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