In Brief: Data Centres, Reckon & Consumers

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Weekly Broker Wrap: AI exposure on the ASX via data centres; upside potential for Reckon; and is the Australian consumer turning the corner?

-Pure-play AI exposure from data centres
-Potential upside for Reckon
-Is the Australian consumer turning the corner?

By Mark Woodruff

Data centre exposures on the ASX

Data Centre exposures on the ASX are the best pure-play AI beneficiaries, with no evidence of meaningful risk to business models, due to large waves of demand, highlights Evans and Partners in a trading-style report focusing on the ASX Technology sector leading into the August reporting season and beyond.

For data centres, and infrastructure more generally, bullishness is justified as the infrastructure rollout will continue at strength as companies make the required investment in AI just to stay relevant (without necessarily a revenue reward), explain the analysts.

The broker likes the setup leading into FY24 results for NextDC ((NXT)), noting industry feedback indicates management has lots of interest from hyperscalers requiring additional data centre space. It’s felt the potential for large deals in the shorter-term is high, and market expectations seem currently quite conservative.

For NextDC’s FY24 results, consensus is expecting underlying earnings (EBITDA) of $197.2m and capex of -$858m, broadly in line with management guidance.

Evans and Partners also suspects Macquarie Technology ((MAQ)) will have an easy reporting season and notes this company usually beats guidance at the margin.

As part of an expansion strategy, Macquarie Technology has begun construction of its latest data centre in Sydney, named IC3 Super West, which is designed to support high-density cloud and AI workloads.

Management should soon be able to start negotiating potential contracts with hyperscale customers, in the broker view, with the centre appearing on track to open in 2026.

Consensus is expecting FY24 earnings and profit for Macquarie Technology of $109.8m and $29.5m, respectively.

While Megaport ((MP1)) will eventually experience leverage to the AI thematic in its numbers, probably not in FY24, suggests the broker. Given a tough networking backdrop, the analysts feel expectations may be too high leading into the reporting season.

Evans and Partners points to broad-based softness in the US networking and cybersecurity market, with the more scaled companies in the space (and in enterprise telecommunications generally) experiencing tough markets for growth.

Driving weakness is the weak macro environment in the US leading to business uncertainty, along with cost-cutting and rationalisation that have led to a slowdown in demand for digital infrastructure services following a post-covid surge and the emergence of work from-home, explains the broker.

The analysts still have a Positive rating for Megaport based on longer-term faith in management’s turnaround plans.

Evans and Partners has 12-month targets for NextDC, Macquarie Technology and Megaport of $21.70, $101.10, and $17.21, respectively. These targets are all higher than average targets in the FNArena Database of $20.14, $100, and $14.62.

Potential upside for Reckon

As banks desire accounting software to lock in customers and harvest data, there may be future upside for accounting practice management group Reckon ((RKN)) via white labeling its software product, according to MST Financial.

Reckon customers use business accounting software across Australia and New Zealand, and the company also has a Legal practice management software business in the UK and the US.

To compete with the likes of MYOB and Xero ((XRO)) in Australia, National Australia Bank ((NAB)) has already partnered up with fintech platform Thriday to create a software package named NAB Bookkeeper. This software comes with AI functionality to reduce administration tasks for customers.

The bank’s aim is to integrate automated banking, accounting, and tax features into internet banking for NAB’s one million small business customers, explains the broker, providing the bank with better quality data it can use to assess customer risk.

The more successful NAB’s software strategy becomes, the more other banks will consider white labelling Reckon’s software, suggests MST Financial.

Is the Australian consumer turning the corner?

Anticipating a stronger FY25 for the Australian consumer because of slowing inflation, tax cuts and rising wages, Macquarie has raised 12-month target prices for stocks under coverage within the Staples, Discretionary Retail, and Food & Beverage sectors.

The broker’s largest percentage target price increases (ranging between 7-14%) are reserved for Coles Group ((COL)) and Woolworths Group ((WOW)) within Staples, and JB Hi-Fi ((JBH)) and Wesfarmers ((WES)) in Discretionary Retail.

While there is a slowing in food inflation for Supermarkets, pressure remains on the cost-of-doing-business (CODB) metric as wages, rents and utilities continue to see higher cost growth than food, explain the analysts. The political backdrop also remains hostile to excess profits for these businesses.

Macquarie lowers the ratings for both Woolworths Group and Endeavour Group to Neutral from Outperform on valuation after recent share price gains.

Within Consumer Discretionary, conditions remain tough for The Good Guys brand (owned by JB Hi-Fi) with consumers cutting back on white goods purchases, but Macquarie’s proprietary data show momentum into FY25 has improved for Durables. 

In a positive for both JB Hi-Fi and Harvey Norman ((HVN)) sales from AI-ready laptops will provide a potential uplift, note the analysts, and the recent tax cuts should deliver a benefit to consumption growth. 

For Wesfarmers, Macquarie notes Bunnings’ specialist tool retailer Tool Kit Depot appears to have taken some market share in professional tools.

The broker expects Kmart will continue to be a market leader in discount department stores, noting how Anko delivered amazing growth in a soft category in February results.

On the flipside, lithium prices remain soft, forcing the broker to lower forecasts for the Mt Holland operations in WA, yet again. 

Macquarie’s only target price change within Food & Beverage, is a small lift for Treasury Wine Estates ((TWE)) due to Penfolds upside on the back of the reopening of trade with China.

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