NextDC Ups The Ante

This story features NEXTDC LIMITED. For more info SHARE ANALYSIS: NXT

-Significant contract win
-Valuation upside likely
-Sale of founder's stake
 

By Eva Brocklehurst

Systems integrator and data centre provider NextDC ((NXT)) has signalled a potential change in its sales strategy, having won a significant contract recently with a global customer. The deal features initial contracted capacity of 1.0MW over a three-year term which may expand to over 1.4MW. To Moelis this suggests the company may accelerate data centre utilisation with contracts that exceed its cost of capital.

Previously NextDC indicated that slow sign-up rates were due to a conscious decision to focus on high-return deals in order to maximise revenue. Now, with a perceived push to increase utilisation, and given the company's fixed-cost model, bringing sales forward should enhance earnings over a shorter timeframe. Moelis has revamped its view of the stock on this basis and assumes the existing data centres will fill in four years, rather than five as previously estimated. The broker calculates a blended sales price in FY16 of $4.2m per MW, growing at the rate of inflation. This is still considered a conservative outlook, given industry growth rates of around 15% are likely to support price increases. Hence, the broker is confident of upside to valuation through price.

Moelis retains a Buy rating, noting the company has reached a point where it is moving to profitable growth this year. Positive aspects of the stock include defensive earnings, operational leverage and favourable industry trends. Moreover, the sale of Bevan Slattery's 10% share in November eliminates the overhang and speculation about the future selling down of the founder's stake.

The broker's valuation reflects NextDC developing and selling the maximum capacity of 35.35MW and assumes balanced revenue growth and capex spending over the four-year period. Moelis maintains the use of an EBITDA (earnings before interest, tax, depreciation and amortisation) multiple understates the stock's valuation, as it does not capture the earnings uplift that is anticipated. Hence, a discounted cash flow valuation is considered a better representation of the value to equity holders. The broker's target price of $2.50 is derived from the average of the DCF and enterprise value/EBITDA multiple.

Other brokers were also upbeat after the company's AGM in November, as the company upgraded its outlook and said interconnections were growing rapidly. NextDC has four Buy ratings on the FNArena database. The consensus target is $2.59, suggesting 44.8% upside to the last share price. Targets range from $2.20 to $3.23.

See also NextDC Outperforming Expectations on November 17 2014.
 

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