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Treasure Chest: NextDC

Treasure Chest | Nov 01 2022

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

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts.

By Rudi Filapek-Vandyck

Whose Idea Is It?

Analysts at Macquarie

The subject:

It's often one of the eternal enigmas of the public forum that is the share market: if it's such a great company, how come the share price is sliding backwards?

Why aren't buyers lining up to get on the register?

The Germans have a great term for it: hineininterpretierung. In share market terms it means: when a stock falls, we find a reason to justify it by reasoning-in a fitting narrative. It's what we humans do best.

So why exactly is the share price of data centres operator NextDC ((NXT)) in a downtrend? Why does the share price continue to fall post the release of FY22 financials in August?

Observing NextDC shares have now underperformed the ASX200 by no less than -18% since that market update in August, the persistent weakness has also caught the attention of Macquarie analysts.

Their conclusion remains NextDC shares by now represent "deep value" while the business overall has not lost its "defensive" character.

The Explanation?

Digging deeper into the NextDC investment proposition, Macquarie does acknowledge higher bond yields do increase debt financing costs for the business. It is estimated a 1% increase in interest rates could raise finance costs by 14% and lower FY25 EPS by some -34%.

But Macquarie is also of the view NextDC shares are not genuinely valued on the forecast EPS; the broker suggests EBITDA instead.

Macquarie observes the shares are currently trading on 23x forecast FY23 EV/EBITDA multiple, which is at a substantial discount to implied transaction multiples in the sector of 33x-38x.

The broker has revised its price target on lower forecasts, to $11.40 from $12.60 – the new target implies that multiple lifts to 30x FY23 EV/EBITDA.

Other potential concerns, such as more customer incentives, the risk of a capital raising and the challenge of cost inflation have been casually wiped off the table.

More Info:

Macquarie is keeping its eyes open for the AGM on November 18 or any update on the sale process of London-based Global Switch, for which NextDC has expressed interest too.

Meanwhile, the broker retains its Outperform rating, in support of the fact NextDC shares are trading at a significant discount to international peers.

FNArena's consensus price target of $12.75 -more than 53% higher than yesterday's closing share price- suggests other analysts share Macquarie's view, in general terms. Indeed, six of the seven stockbrokers monitored daily by FNArena rate the stock positively.

The one exception is Credit Suisse whose Neutral rating and $10.90 (31% above the share price) is taking guidance from the fact that new contracts are slower in ramping up.

If we expand the coverage with Wilsons and Goldman Sachs, we simply add two more positive views.

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