Macquarie Technology: Just A Flesh Wound

This story features MACQUARIE TECHNOLOGY GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: MAQ

A supplier price hike is proving a setback for Macquarie Technology’s cloud services business, but increasing data centre capacity is where the value lays.

-Macquarie Technology’s FY24 result in line
-Cloud services business hit by a price hike
-Data centre construction continues
-Longer-term prospects tied-in with data centres

By Greg Peel

The primary attraction of Macquarie Technology Group ((MAQ)) in 2024 is as a builder and operator of data centres, as is the case with better-known peer NextDC ((NXT)). Macquarie Technology began life as a telecom company, called Macquarie Telecom, and continues to provide telecom services alongside its cloud and data centre services.

This differentiates the company from NextDC, as well as its much smaller land bank for the purpose of data centre construction. It must also be noted Macquarie Technology is in no way related to investment bank Macquarie Group.

Macquarie Technology reported FY24 results in line with expectations, featuring a 5% year on year increase in revenues, a 6% increase in earnings and an 86.5% increase in profit. Earnings grew across all divisions, albeit the Telecom division delivered an uplift in margins which offset weaker growth in the Cloud Services & Government (CS&G) division.

Inflation Bites

As is typically the case, management did not provide specific FY25 guidance, claiming simply to be “confident of earnings growth”. Success would make FY25 the eleventh consecutive year of earnings growth for the company, Petra Capital notes. But there is a stumbling block.

The company’s CS&G division has been hit with a notably large price hike from a key software vendor. Management highlighted an inability to pass through pricing to government customers in the short term, while higher prices for private sector customers have driven slower decision making.

This revelation has led brokers to downgrade their FY25-26 earnings forecasts.

Management noted, nonetheless, underlying customer demand remains robust, though working through new contract terms and/or transitioning its Platform-as-a-Service supplier could take some time. The medium term outlook for the business remains strong, and Goldman Sachs highlights CS&G delivered underlying earnings growth of 11% in FY24, after normalising for loss of government consulting earnings.

Canaccord Genuity does not wish to play down the significance of earnings downgrades, but insists the “main game” for Macquarie Technology is its IC3 Super West data centre.

The Main Game

Macquarie Technology operates five data centres IC1 (intelligence centre) is in the Sydney CBD, IC2 is at Macquarie Park in Sydney (also no relation), IC3 is also at Macquarie Park (East) and IC4 and IC5 are located in Canberra, specifically to service government clients.

The company is in the process of expanding IC3, building the new IC3 “Super West” centre. Brokers are excited about the intention to increase this centre’s capacity from 38MW to 45MW (subject to approvals, which are in progress), which would take the total IC3 capacity to 63MW without increasing the campus footprint.

Phase one of IC3 Super West is expected by management to require -$350m in capex. Completion is expected in the September quarter of 2026. Goldman Sachs expects an additional -$400m in capex will be required beyond FY26 to bring Super West to full capacity.

Construction is underway, though Goldman would not expect a hyperscale customer announcement for another twelve months or so.

Globally, data centre builds continue to become bigger in scale to cater for large capacity contracts. Macquarie Technology is well placed to capture a large deal, Petra Capital suggests, especially considering the prime Macquarie Park location.

Macquarie Technology’s balance sheet is solid, Goldman Sachs notes, with net debt only 0.1x earnings, and the company is aiming to finalise an increase in its bank debt facility (which has $190m currently unused) during the first half FY25, with ample liquidity to fund Phase one Super West capex.

On Goldman Sachs’ estimates, gearing peaks at 3.9x in FY28, before incorporating any additional land acquisitions, potentially creating the need for further funding requirements in the medium term.

Canaccord Genuity notes combined with the undrawn debt of $190m, Macquarie Technology’s FY25 capex intentions are comfortably covered before any consideration of the group’s “formidable” free cash generation.

The Value Play

Morgan Stanley believes the build-out of already announced data centre capacity plus new contract and/or capacity wins will be a significant positive for the shares. Macquarie Technology is not a pure-play data centre operator, and nor does it have the same landbank as main peer NextDC, thus it is not growing as fast as NextDC, Morgan Stanley notes.

Yet, this has advantages, the broker suggests. Macquarie Technology’s construction pipeline is more measured, and it is not as capital-hungry. Morgan Stanley values its data centre assets at around $50 per share versus the current trading price (last circa $76). The broker highlights the stock’s FY25 forecast earnings to enterprise value ratio of 17x, compared to NextDC on some 50x.

Morgan Stanley retains an Overweight rating and a $100 target price.

With the company now having broken ground at IC3 Super West, Wilsons is looking for further insight on funding costs, construction partner(s) and indicative demand for the asset, including the potential for a large customer to “put their foot on capacity” earlier than usual, given the high level of industry demand for hiqh-quality data centre capacity in sought-after locations like Macquarie Park, which is now a prime Sydney-based technology hub.

Wilsons is also keen to hear news on Macquarie Technology securing its next data centre site. This broker also has an Overweight rating and has increased its target by 19% post-result to $97.27.

Given downgraded estimates for CS&G earnings, due to the price-hike dilemma, Canaccord Genuity has cut its target to $116 from $118, maintaining Buy.

More circumspect are Petra Capital and Goldman Sachs.

Petra recognises the positive longer term structural thesis that Macquarie Technology presents, but the slower growth in CS&G causes this broker to pause. Hold retained, with a target cut to $87.81 from $90.37.

Goldman Sachs expects a robust earnings growth outlook driven by the ramp-up of hyperscale cloud deployments and continued growth in managed services, with long-term shareholder value creation underpinned by attractive returns on data centre investments. This broker believes the stock is fairly valued on a sum-of-the-parts basis compared to peers, with high-quality underlying businesses across the IT stack from data centre infrastructure to managed services and cybersecurity.

Goldman is positive on management’s strategy and long history of successful execution, but at current valuation levels sees this as priced into the shares. Neutral retained, with a -6% cut in target to $84.90.

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