NEXTDC

About the author:

Author name:

By Nick Harris

Job title:

Senior Analyst

Date posted:

24 December 2015, 9:05 AM

Sectors Covered:

Telecommunications, Technology

Key points

• NEXTDC has undertaken a A$100m bond raising and supercharged its balance sheet with a A$120m equity raising. The funds will predominantly be used to build additional Data Centres in Brisbane (B2) and Melbourne (M2).
• This time around NXT will own the land and buildings and make the facilities 2-3x larger than the first round.
• In the short term the capital raising is EPS dilutive on our estimates but is DCF accretive as NXT deploys A$220m of new funding to generate healthy returns.

The new facilities will be turned on in 2H17

We had expected NXT to fully debt fund B2, which is now at ~90% utilisation. We didn't expect M2 for another three years but strong customer demand (including 4-5MW of advanced discussions across NXT's entire DC footprint) makes it likely that M2, which is now at 77% utilisation, will run out of capacity in the next two years. 

NXT has announced plans for a 6MW facility in Brisbane and 25MW in Melbourne. Current rack-ready sales rates (~0.5MW pa in B1 and ~1MW pa in M1) mean it will take a long time to fill these facilities without substantial whitespace deals. Consequently, we expect NXT to secure whitespace deals across Cloud, Content, Enterprise and Government.

Access to capital is becoming a barrier to entry for competitors

In our view, M2 and B2 cement NXT's competitive position. At the startup phase the high capital intensity of DCs is a challenge, but we now think prospective domestic competitors will struggle to match NXT's access to capital. 

With an impressive ROIC and access to substantial capital (debt, equity and operating cash flow), we believe NXT is widening the competitive moat and cementing itself as Australia's largest independent national Data Centre provider.

Investment view

Key catalysts include the potential for NXT to sign large whitespace deals in the near future and the possibility of ASX200 index inclusion. Downside risk relates to the potential for slower-than-expected fill rates in B2 and M1 (M1 needs to be ~90% filled before M2 opens to prevent self-cannibalisation).

We have adjusted our forecasts to factor in the higher equity, debt and increased capex as NXT builds B2 and M2. Our FY16 and FY17 EPS forecasts have been reduced substantially due to a higher share count and depreciation, but our DCF increases due to higher earnings in the later years (more than offsetting the EPS dilution).

We retain our Add recommendation and upgrade our share price target.

More information

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Disclaimer(s): Morgans was a Co-Lead Manager to the entitlement offer and received fees in this regard.

Analyst owns shares.

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.