NextDC Riding The Wave

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

-Contract a sign of strong demand
-Full earnings flow from FY17
-Plenty of funds for options
 

By Eva Brocklehurst

NextDC ((NXT)) has received an endorsement from a major corporate customer, with a repeat sale of capacity. While the customer's identity is undisclosed – press speculation previously suggested Microsoft – it signals the corporate is happy with the value NextDC is offering.

The systems integrator and data centre provider has announced an additional 4MW contract from an existing customer in the "white space" arena. The agreement covers 2MW in each of its Melbourne and Sydney data centres, contracted for a term of five years, with an option to extend for a further five years. This adds to the 6MW the customer previously contracted. A senior secured debt facility for $50m will replace NextDC's current $20m facility while a second senior unsecured note will be issued to raise around $70m.

The deal validates NextDC's business model and strategy, in Citi's view. Macquarie also considers the company well positioned to benefit from high demand for capacity in data centres, driven by the substantial growth in internet traffic and a trend towards hybrid solutions.

The contract will only have a material earnings contribution from FY17 but Moelis maintains it is a sign that demand is strong. The broker also highlights the fact that "white space" customers bring in additional cross-connect revenue, not otherwise accounted for in contracted revenue. Cross-connects are high margin, recurring revenues that can make a material contribution over the longer term.

It may take another eighteen months before the platform goes live and the customer starts paying NextDC in full, but Morgans is pleased with the refinancing, which provides plenty of funds, given the win on this contract will accelerate capex by much less than the debt acquired. The new deal requires fast-tracking of capex, as it will exhaust some of the current inventory in Sydney and Melbourne which will need to be replaced. Still, the amount of funds available creates options for NextDC. Maybe in Brisbane? Morgans emphasises the company makes no comment on why it needs so much capital but there are two possible conclusions that can be drawn.

One is that NextDC is expecting sales to accelerate strongly and, secondly, there is the possibility of a second Brisbane centre (B2). On Morgans' forecasts, the B1 centre is about 80% full now and, generating strong returns, likely to be full within 18-24 months. Should the company decide it needed a second centre in Brisbane it would need to start construction soon. Either way, there is room for further large deals, in Morgans' view, should the right opportunity present.

As of June 30 2015 the broker estimates NextDC has sold 20MW in power, taking contracted utilisation to 55% and actively utilisation to 37% of its total 42MW. Morgans believes the deal underpins second half FY16 and FY17 forecasts and believes there is is upside risk for guidance and market expectations at the FY15 results.

Citi estimates that NextDC will have $160m in capital following the note offering, out of the $196m required to reach targeted capacity. Future operating cash flows could also be used for funding, which suggests to the broker that the company is now less reliant on equity to meet growth targets. There are some potentially negative considerations in Citi's view: client concentration risk increases and white space clients are, on average, lower earners than rack space clients. They are also difficult to displace should the need arise. Still, this contract provides considerable revenue visibility and, in turn, reduces future investment risk.

FNArena's database has four Buy ratings. The consensus target is $3.00, suggesting 25.8% upside to the last share price. Moelis, which is not included in this list, maintains a Buy rating and $3.00 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