Small Caps | Jun 22 2023
This story features MACQUARIE TECHNOLOGY GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: MAQ
Recent research on Macquarie Technology shows a strong near-term cloud demand outlook and a significant growth profile in coming years.
-Buoyant demand environment for Macquarie Technology
-Recent capital raising provides multiple benefits
-Positive US data centre trends emerging in Australia
-Potential for ASX300 inclusion
By Mark Woodruff
Artificial Intelligence (AI) has the potential to drive a third wave of cloud computing demand over coming decades, according to Goldman Sachs, which will underpin demand for local, scaled data centre players such as Macquarie Technology ((MAQ)).
The company, formerly known as Macquarie Telecom Group, provides telecommunications, cloud computing and data centre services to corporate and government customers in Australia. The business has data centre assets in Sydney and Canberra. (Note the company has no connection to investment bank Macquarie Group.)
Goldman Sachs believes Macquarie Technology is building an enduring cloud franchise around hyperscale public cloud, private/hybrid cloud managed services and cybersecurity.
The demand environment remains buoyant, observes the broker, supported by public sector IT spending and structural growth in hybrid cloud.
The analysts' investment thesis includes the company’s sound track record of capital allocation and execution, along with a significant growth profile in coming years.
In terms of valuation, the company not only trades at a sum-of-the-parts discount to peer NextDC ((NXT)) in Data Centres, according to Goldman’s numbers, but also trades at a discount to Data#3 ((DTL)) in the Cloud Services & Government division.
Nonetheless, Wilsons points out an overall discount to NextDC and other data centre peers is warranted, given the Telecom Segment comprises around 18% of Macquarie Technology’s earnings and has significantly lower margins compared to the data centre and cloud businesses.
Both Wilsons and Goldman Sachs were excited by completion, one week ago, of Macquarie Technology’s $160m institutional placement at $58.50/share to support the data centre business in its next phase of growth.
Management is looking to capitalise on the fast-growing cloud and AI megatrends which management believe will drive “higher power density and demand for data centre capacity”.
Wilsons feels data centre trends being seen in the US are likely to translate into the Australian data centre market, with management saying “green shoots” are already appearing.
Positives of the equity raising
Goldman Sachs points out stock liquidity is a positive development for the company’s shares and has previously been a key pushback by investors.
Wilsons agrees and suggests the extra liquidity is an incremental step towards the company being potentially included in the ASX300 Index in September.
On numbers calculated by the broker before the raising was upsized to $160m from $130m, the new Free Float Market Cap ranked the company at 264, up the list from 289.
Such a move allows Macquarie Technology to meet the strong addition threshold rank of 274, from a Free Float Market Cap rank perspective. The 30% relative liquidity threshold required in order to be eligible for the index is also expected to be met.
Apart from the extra liquidity obtained via the equity placement, Goldman also likes the implied confirmation of strength in the cloud demand outlook, as well as the additional funding for data centre developments to help secure the growth outlook and reduce leverage.
Guidance and capex updates
Back in late February, the earnings and profit forecasts by consensus and Canaccord Genuity were exceeded by Macquarie Technology, when posting first half results.
Data Centre earnings were the key to the year-on-year uplift in earnings, noted Canaccord, while cash conversion of 102% was considered extremely positive.
Last week, management reiterated its FY23 earnings (EBITDA) guidance of around $102-$104m, which was broadly in line with the forecasts by Wilsons and consensus.
Capex guidance was downgraded to $60m-$63m from $72m-$76m to reflect a change in spending mix and the ongoing delay in the Development Approval from Ryde Council for the IC3 Super West data centre in Sydney, explained Wilsons.
IC3 will be built on the company’s Macquarie Park campus, which is also home to IC2 and IC3 East.
Wilsons, Goldman Sachs, Wilsons and Canaccord Genuity all have Buy (or equivalent) ratings for Macquarie Technology.
The average target price of the three brokers is $75.89, which suggests around 12.6% upside to the current share price of around $66.33.
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