Megaport Limited: Lining it up from the fourth

About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
23 July 2021, 8:00 AM
Sectors Covered:
Telecommunications, Technology

  • Earlier this month Megaport Limited (ASX:MP1) pre-released the KPIs for its Q4 result. The highlights included: a record sale quarter on a number of fronts, first customers for their new MVE product and $136m of cash at bank.
  • With the full details of MP1’s Q4 result now released, we update the finer details in our model, and roll forward 12 months. The net result is we increase our target price by ~5% to (login to view).

Event: Q4 finer details

In our view, the key data point that most investors are focused on was the Q4 sales figure/rate of sales growth. Pleasingly, sales accelerated materially in Q4, as anticipated.

In Q4, MP1 booked $22.7m of revenue, to end FY21 with $78.3m of revenue and Annualised Recurring Revenue (ARR) of ~$90m ($7.5m for June 2021). Our forecasts have MP1’s ARR exceeding $100m before the end of CY2021. 

MP1 booked a number of record growth figures in Q4. These included record growth in ARR, record quarterly adds in Customers, Ports, Services and Megaport Cloud Routers. Q4 also included maiden MVE (Megaport’s Virtual Edge) sales, with 21 MVEs sold to 9 MVE customers in Q4.

MP1 ended the year with $136.3m of cash so remains well-funded.

Analysis

ARR growth for the quarter was +$8.5m versus historical quarterly ARR growth of ~$5m. It was a bumper quarter. MP1 ended the year with ~$90m of ARR.

The rate of sales in Q4 was a record. MP1 added $3.1m of revenue in the quarter versus an average of $1.3m (added per quarter over the last ~ 2 years). This $3.1m did include some revenue adjustments (some accounting quirks that do not substantially impact pure ARR). 

To hit FY22 consensus revenue of $114m, MP1 needs to book $35m of additional revenue in FY22 ($114m – $78m). They booked an additional $20m from FY20 to FY21 ($78m – $58m) but this was also negatively impacted, on translation, by a stronger AUD. Growth in constant currency terms was stronger. On our estimate, currency took $2m off revenue growth, from FY20 to FY21. 

In our view MP1 and its partners need to make meaningful traction with respect to selling MVE to see sales accelerate. We think this looks achievable, albeit a bit of a stretch target and noting that currency could help (assuming AUD/USD stabilises).

On our forecasts MVE sales contribute ~40% of FY22 revenue growth. It is a higher revenue per customer product, so required customers adds are not as large.

Forecast and valuation update

We have tweaked our forecasts following the details of Q4 and rolled our valuation forward by 12 months as we move into FY22.

Investment view: Hold retained

We rate management, their track record and the MP1 business model highly. That said, we would prefer to add to MP1 positions on any share price weakness.

Price catalysts

FY21 result released on Tuesday 10th August (although key details are known).

Q1FY22 released on Thursday 21st October.

Key share price drivers will be data points supporting an acceleration in sales in FY22 and proving there is healthy customer demand for MVE.

Risks

MP1 is not yet a cash generative business and needs to grow revenue to reach this point. With $136m of cash at bank, MP1 has ample runway.

MP1 is a high-growth business and as such is subject to significant share price volatility. This includes a valuation highly sensitive to bond yields and inflation.

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Disclaimer: 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.

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