NEXTDC: Future is Cloudy with plenty of options yet to play out
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 30 August 2021, 11:30 AM
- Sectors Covered:
- Telecommunications, Technology
- NXT’s FY21 result was slightly better than guidance and our forecasts. FY22 revenue and EBITDA guidance is in line with market expectations. For both years growth was/is expected to be 20-30% pa. It was a good year and a good outlook.
- Both MWs billing and MWs contracted jumped ~5MW in 2H21 to 50MW and 75MW respectively, ahead of our forecast. Business as usual and 10MW contracted but not yet billing underpins EBITDA growth for the next two years.
- The 30-40% pa growth in Cloud Service Provider revenue (to June 21) reinforces our view that demand is high, and options should get exercised, soon.
- We make minor EBITDA upgrades. Our DCF increases to (login to view). Add retained.
Event: FY21 result
Data centre revenue grew 23% yoy to $246m; energy prices (and improved operating efficiencies from NXT) resulted in lower COGS / higher gross profit margins for NXT in 2H21. This led to revenue being slightly lower than we expected.
Given large customers have power pass through, this actually improves margins, and NXT’s EBITDA margin edged ~200bps higher hoh / yoy to 55%. Underlying EBITDA of $134.5m was up 29% yoy and beat the top end of guidance.
Spending ~$400m of capex in FY21 proved harder than planned. Consequently, $100m of this spend has been pushed into FY22 with ~$500m capex planned.
Operating cashflow rebounded, up 148% yoy, off a weaker FY20. NXT ended the year with $1.7bn in liquidity so is well funded for the year ahead.
The highlight was that NXT contracted 4.6MW of capacity in 2H21. We forecast +0.6MW so this was well ahead of our expectations. We understand this relates to a combination of strong enterprise demand and a variety of Cloud Service Providers placing orders in Sydney.
MW contracted but not yet billing and BAU sales through the channel unpin NXT’s capacity to generate ~$200m of EBITDA in FY23. With new facilities coming online and management continuing to invest in growing and evolving the business, our forecast is for $186m (with upside risk). Options with CSPs could push this to $300m (assuming 100% billing).
Forecast and valuation update
We upgrade our revenue forecasts in FY22/23 by 1-2% and EBITDA by 1-4%. Higher depreciation, amortisation and interest charges reduce our EPS forecasts materially, albeit off a low base.
Our DCF based valuation ~4% higher to (login to view).
Investment view: Add
We retain our Add recommendation and highlight that NXT remains our preferred pick.
We see a clear pathway for long-term growth, substantially higher EBITDA and material free cash flow, over the medium term.
In the shorter term we think there are catalysts to continue driving the share price higher, as explained below.
The massive structural growth of Cloud and digitisation continues to require significant digital infrastructure. NXT is a key supplier at the forefront of this trend. In our view, this means there is a high likelihood of CSP options getting exercised.
These in aggregate are material in size, at ~54MW. The exercise of some or all of these options unpins substantial earnings growth potential.
Management noted a possibility of a debt upgrade (more debt funding at lower prices) which should continue to lower NXT’s cost of capital (increasing value).
S4 is a new, medium term, hyperscale opportunity for NXT. The potential customer demand and funding structure present upside opportunities.
Execution (construction, uptime, time to fill facilities), interest rates, competitive environment, and return on capital (relative to market expectations).
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