Megaport

About the author:

Author name:

By Nick Harris

Job title:

Senior Analyst

Date posted:

25 January 2018, 3:40 PM

Sectors Covered:

Telecommunications, Technology

Key points

• Megaport (MP1) announced the launch of its next level product Megaport Cloud Router (MCR). This simplifies a complex set of cloud connectivity products and creates an easier solution for the end customer.
• Previously customers needed to have physical hardware (switches and routers inside Data Centres) combined with IT smarts to use the MP1 solution. MP1 can now manage the connection/ technology stack between Cloud providers so some customers don't need to own and operate hardware.
• This opens up a new and complimentary market to MP1 and we expect substantial growth in new cloud to cloud and existing cloud to data centre connectivity.
• We retain our Add recommendation and increase our price target (client access only)

What is Megaport Cloud Router (MCR)

MP1 have released a new product which is a layer 3 connectivity product called Megaport Cloud Router (MCR). This simplifies connecting between Clouds which increases the addressable market (as less technical skills are required to use MCR).

For those that understand the difference between dark fibre and a managed service this is a reasonable example of the product differences. In both instances different customers want different connections and the two are complimentary (customers typically use one of the two, not both).

IT smart customers would likely have data centre space and an IT department to manage Cloud Connectivity (and other things). However newer cloud only companies could be infrastructure light, have no IT department and connect cloud to cloud using MCR. See MP1's 2 minute video explanation here at or refer overleaf for our explanation.

Size of the addressable market becomes multiples higher

We view this new product as being complementary to MP1's existing product range and consequently think its opens MP1 to a wider addressable market (i.e. this will generate more revenue for MP1).

We also expect further evolution over time as MP1 continues to bring new connectivity solutions to the market.

Quantifying the revenue upside is difficult, but we expect the new layer 3 market is multiples larger than the layer 2 market (there are many more companies without IT departments and dedicated infrastructure than with) so we expect the revenue potential for MP1 is multiples higher.

Investment view - Add retained

We have upgraded our medium-term forecasts and now forecast MP1 to generate an exit run rate EBITDA of A$43.5m in 2021 (from A$27.4m in 2020).

Key changes reflect higher port utilisation (due to higher customer demand) and additional revenue on the new product launch.

We retain our Add recommendation. MP1 now has the key pieces of the puzzle in place including connectivity to five of the top five Global Cloud Providers (IBM Cloud was added to the Megaport fabric in late 2018).

Risks and rewards now largely come down to execution and generating cashflow to fund MP1's growth programs.

More information

Morgans clients can login to view our detailed report and upgraded share price target for Megaport (MP1). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer(s): Analyst owns shares.

Morgans Corporate was a joint-lead manager to the placement of Megaport shares in June 2017 and may receive fees in this regards. Morgans Corporate Limited Morgans was the lead manager to the public offer of shares in Megaport Limited in November 2017 and may receive fees in this regard. Morgans Corporate Limited was the Lead Manager to the initial public offer and subsequent July 2016 capital raising of MegaPort and may have received fees in this regard. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.