- NXT announced it has sold 9MW in S2 which takes the facility to 14.5MW /48% sold at opening. It takes a few years for these large customers to move from contracted to paying as they progressively setup their infrastructure inside S2.
- In addition to factoring in the new contract wins we also take the opportunity to include NXT's acquisition of AJD (land and buildings for S1, M1 and P1) and the new accounting standards into our profit and loss forecast. Hold retained.
Starting S2 near the halfway mark
NXT have announced the signing of a 9MW deal in its Sydney 2 (S2) Data Centre which is expected to go live presently. This was partially anticipated as capex guidance from August flagged a large increase in S2 capacity, however it was not in our forecasts.
We expect this is an existing customer and, as is typical of the larger deals, will take ~3 years to become 100% paying. This represents a very strong start for S2, which is already nearly 50% sold, despite not yet being officially opened.
S2 is in stark contrast to M2 and B2 which have been open around 12 months, and on our estimates are ~5% contracted.
Bringing AJD back to the group
NXT completed the (re)acquisition of AJD (S1, M1 and P1 land and building) and we factor this into our forecasts. It is EPS accretive (removes rent costs) but DCF decretive (instead of investing in DC assets generating a ~15% ROIC the capital is saving / generating a ~5% ROIC).
Offsetting this, one can argue that ownership of land and building should lower NXT's WACC, so we have lowered our WACC from 8.6% to 8%.
Debt previously secured against AJD properties was costing less than 5% and is cheaper than NXT's current ~6.5% blended cost of debt.
The net result of this is our DCF decreases 10% from A$7.06 to $6.36 (pre the S2 wins).
Accounting standards and forecast changes
We now take the opportunity to change our P&L forecasts to reflect new accounting standards (AASB15 and AASB16) which come into effect from 1H19. ASSB16 means that rent is reclassified from an operational cost to a depreciation and interest expense (EBITDA goes up but NPAT is unchanged as costs are expensed below the EBITDA line).
AASB15 means project revenue and some internal commissions, which were previously recognised in the year the work was completed, now need to be recognised over the term of a customer contract (including options).
NXT estimate the impact to be –A$5.2m on FY18 and we expect it to have an even larger impact on FY19 EBITDA.
Customer cash payments for project work will still occur in the year the work is done so going forward cashflow conversion should be higher (excluding impacts from back book reclassification).
Investment view – Hold retained
The net result of the above is that we upgrade our EBITDA per share forecast by ~16%, on an annualised basis, and EPS moves materially higher. We also upgrade our FY19 capex by A$200m or 47% to reflect the AJD purchase.
Our DCF-based valuation and price target edge 2% lower (share price target visible for Morgans clients) and we retain our Hold recommendation.
The S2 contract win is a big win for NXT however they still need to sell ~25MW per annum to fill Generation 2 and Generation 3 facilities in under 10 years.
Given the changed landscape we would be comfortable with the company lowering its ROIC target to <15% to achieve this.
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Disclaimer(s): Analyst owns shares.
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