NEXTDC: Finely tuned and waiting for the green light

About the author:

Author name:

By Nick Harris

Job title:

Senior Analyst

Date posted:

30 August 2022, 7:00 AM

Sectors Covered:

Telecommunications, Technology

• FY22 underlying EBITDA was up 26% yoy, 1% ahead of guidance and 2% ahead of consensus. FY23 underlying EBITDA guidance is for ~15% yoy growth which is in line with consensus. Overall it was a strong result and outlook which shows NEXTDC’s (ASX:NXT) resilience to both pandemics and inflationary pressures.
• With new facilities online in FY23 (S3 live, M3 coming soon) and strong customer demand, the key challenge which is beyond management’s control is customers’ ability to buy DC equipment. Supply chain is a major customer challenge that will get resolved. We hope this is an FY23 story (for big contract wins) but it could take a bit longer. New chip manufacturing plants go live in USA/Japan in CY24.
• We upgrade our FY23 EBITDA forecast by ~7% and retain our Add rating.

Event: FY22 result

Underlying EBITDA beat the upper end of guidance. Statutory was lower than we forecast after expensing expansion costs (Asia and potential acquisition) and expenses from associate losses (not specific to NXT’s operational performance).

Operating cashflow declined yoy. It was still >100% but after 129% cashflow conversion in FY21 this normalised in FY22. NXT ended the year with ~$600m of net debt, ~$2bn of liquidity and its cost of debt fully hedged in FY23.

Analysis

Revenue was up 18% yoy and underlying EBITDA up 26% yoy. The strong fixed cost leverage of NXT was apparent. As new facilities (S3 and M3) come online in FY23 cost growth will, as expected, initially outstrip revenue growth. We expect margin expansion with scale/uptake.

Higher power costs in later FY23 (which are largely passed onto clients) mathematically also result in margin compression (higher revenue per MW but the same GP/EBITDA per MW as before).

MW contracted increased by 12 in FY22 (after +22MW in FY21). 73MW was billing in June 22 with another ~10MW contracted but not yet billing. Conversion from contracted to billing (plus new enterprise contract wins and higher power costs) will result in revenue growth accelerating to +20% in FY23 (from +18% in FY22).

Management noted FY22 was a best ever year in terms of enterprise sales. After a few years of relative stability, the channel is firing as enterprises upgrade their network architecture for the new world in which we live, working from anywhere.

Inflation is a concern to many but currently an opportunity for NXT. S3 and M3 were built and partially fitted out with fixed price contracts (pre inflation prices). This, plus NXT’s superior power efficiency, makes NXT a destination of choice for many. NXT is >50% more energy efficient (cheaper to run) than almost all on-premise and legacy data centres.

They also happen to be substantially more resilient (to energy and environmental volatility) and better connected with 1.6k customers.

Forecast and valuation update

We upgrade our FY23 revenue by 2% and EBITDA by 6.5%. Our NPAT forecast jumps materially, albeit off a low base while our DCF increases to (login to view).

Investment view

We retain our Add recommendation. NXT remains our preferred pick given substantial structural growth, quality management, significant barriers to entry and, in our view, improving competitive advantage (scale plus regional/edge sites).

We see a clear pathway for long-term growth, substantially higher EBITDA and material free cash flow, over the medium term.

Price catalysts

Large ongoing sales (more contracted MWs are likely as S3 and M3 turn on).

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. The probable exercise of some or all of these options unpins substantial earnings growth potential for NXT.

Risks

Execution (construction, uptime, time to fill facilities), interest rates, competitive environment, and return on capital (relative to market expectations)

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