NEXTDC: Energy price rises are not that material

About the author:

Author name:

By Nick Harris

Job title:

Senior Analyst

Date posted:

20 June 2022, 3:30 PM

Sectors Covered:

Telecommunications, Technology

• Following meaningful increases in spot energy prices, we review NEXTDC’s (ASX:NXT) energy price exposure and show its earnings are not materially exposed to higher prices.
• NXT typically contracts energy rates annually. We estimate that ~80% of FY23 power costs get passed straight through to its wholesale customers. The remaining ~20% is enterprise and subject to annual price reviews which are typically the greater of CPI or 2.5%. Enterprise contracts also allow NXT to pass on material structural changes in energy prices (which it has done once in the last decade).
• NXT’s power costs have five parts. We estimate the energy MWh rate is somewhere between 30-40% of the total cost of power. A theoretical tripling in MWh prices would add ~70% to NXT’s total power bill. If we pass this straight through to wholesale and add a ~5% CPI rise for Enterprise, NXT’s EBITDA likely decreases by just 1% on an annualised / pro-forma basis. Any impact commences in 2HFY23.

Event – reviewing the impact of rising energy prices

Energy prices across the globe have risen strongly and this has left investors wondering about NXT’s exposure to rising energy prices. NXT buys energy with 12-month forward prices fixed. These come in calendar years tranches and mean recent price increases will have no impact until 2HFY23/ CY23.

NSW is ~60% of NXT’s billing MWs and MWh futures prices have jumped from $60 in June 21 to $190 in June 22. VIC is ~30% of billings and futures prices have jumped from $42 to $120 over the same timeframe (www.asxenergy.com.au).

Our sensitivity analysis indicates a tripling of MWh rate adds ~70% to NXT’s total power bill. This sensitivity shows FY22 pro-forma revenue increases by ~10% and EBITDA decreases by 1%. Again, we note no impact will be seen until 2HFY23/ CY23.

Analysis – the facts around NXT’s energy bill

In NXT’s 1H22 results presentation it points to ‘power and consumables’ (COGS) being ~16% of total revenue. Power is clearly the largest component and we estimate it consumes about 15% of revenue (costing ~$45m in FY22).

MegaWatt hours of energy consumed are one of the five parts of NXT’s total cost of power. We estimate these account for ~30-40% of NXT’s power bill. The other four parts which have not moved materially are:

1. Fixed network capacity charges
2. Variable network charges
3. Various Federal and State renewable charges (renewable certificates)
4. Market and ancillary charges

NXT’s ‘Wholesale’ or ‘Cloud Service Provider’ contracts all have power pass through in their contracts. CSPs run their servers harder than traditional enterprise customers as this is their core business.

This means the amount of power consumed by CSPs (on a per rack basis) is materially higher than Enterprise. Consequently, NXT’s total ‘energy price risk’ is less than its Enterprise exposure.

Implications – energy price moves not material, but also an opportunity

We see upside risk to FY23 consensus revenue and are comfortable with EBITDA. 

NXT has been independently certified as the only Australian data centre provider with a NABERS 5-star rating for energy efficiency. It has also been independently certified with PUE of 1.4 in FY21 which is well below the Australian industry average of 1.7.

This means NXT is >50% more energy efficient than peers and much more energy efficient than on-premise. Customers looking to save money due to rising energy prices may well fast-track their migration to NXT.

Investment view – Add retained

Our last published research had an 8% WACC using a 2.5% Risk Free Rate. We increase our Risk Free Rate to 3% and this reduces our DCF based target price ~10% to (login to view).

NXT’s cost of $1.1bn debt (2 of its 4 tranches) is unchanged by interest rate movements. This cost of debt is fixed until December 2024 via interest rate swaps.

Price catalysts

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

Risks

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

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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.