NextDC Set To Take Out Landlord

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

NextDC is expected to have more sway in its business once the acquisition of Asia Pacific Data Centres goes ahead.

-Removes a landlord, enabling company to focus on expansion
-Brings S1, M1 and P1 under NextDC ownership
-Demand remains robust but deals taking longer than expected
 

By Eva Brocklehurst

NextDC ((NXT)) is set to acquire its landlord, removing an irritant and allowing the company to focus on expanding its business. NextDC will acquire the remaining 70.8% of Asia Pacific Data Centres ((AJD)) for $2 a share after a long-running dispute with co-investor 360 Capital ((TGP)), as long as there is no better offer forthcoming.

Hence, the transaction will provide control over expansion and provide a higher asset backing. As a result, CLSA increases FY19 and FY20 forecasts for operating earnings by 10% and 13% respectively.

The broker suspects the stock has been weak because it has not established new contracts in the second half yet believes demand remains robust. Simply stated, deals are taking longer to come to fruition, as many customers are hyper-scale cloud providers which require approval from centralised headquarters.

Moreover, CLSA does not believe all supply from competitors, while significant, will get built and NextDC is supported by factors such as reliability, location and the ecosystem of its customers. The broker, not one of the eight monitored daily on the FNArena database, maintains a Buy rating and $8.74 target. Several other brokers envisaged upside risk at the time of the company's results if it were to acquire Asia Pacific Data Centres.

Deutsche Bank upgrades to Hold from Sell, concurring there is merit in owning the data centres, although views the funding of the transaction from reserves as a minor negative from a capital allocation perspective. After interest, Morgan Stanley considers the deal largely neutral and maintains an Overweight rating.

Acquisition Details

The acquisition is via an on-market cash takeover proposal and 360 Capital (which once also bid for AJD) intends to accept on behalf of its 67.3% stake in the absence of a superior proposal. Cash consideration is $2 plus a special dividend of 2c per share is payable on November 14. This is equivalent to net tangible assets as of June 2018 of $261m and a 9.2% premium to the AJD 30-day volume weighted average price (VWAP).

The deal will bring three data centre properties currently occupied by NextDC into its stable, in Sydney (S1), Melbourne (M1) and Perth (P1). This would represent annual rental savings of around $14m. UBS calculates a net pre-tax benefit of around $4m in FY19 and around $7m in FY20. Nevertheless, once the cost of acquisition is applied against bank debt the longer-term benefit is lower.

FNArena's database shows three Buy ratings and three Hold for NextDC. The consensus target is $7.91, suggesting 25.2% upside to the last share price. Targets range from $6.30 (Deutsche Bank) to $9.30 (UBS).

See also, NextDC Needs New Major Customers on September 3, 2018.

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