Megaport Limited: Razor focused on-ramping

About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
02 March 2020, 1:20 PM
Sectors Covered:
Telecommunications, Technology and Financial Services

  • MP1’s 1H20 result was in-line with our forecasts, and their recently released quarterly. Continued strong growth in North America (NAM) and expansion into Japan (which is a top 5 global Cloud consumer) were the highlights of the half.
  • Following a more detailed review of our forecasts we have reduced our revenue forecasts which reduces our FY20 EBITDA forecast by ~5%. Offsetting this, our DCF based valuation rises (login to view target price), largely reflecting a lower share count. MP1 raised ~$60m in late CY19. We had forecast a further capital raise but due to a higher share price fewer shares were issued than we had forecast.
  • We retain our Add recommendation and note key catalysts for MP1 relate to the possibility of ASX200 index inclusion shortly. Operationally, investors will be focused on MP1’s capacity to accelerate sales growth. Achievement of this and/or potential ASX 200 index inclusion would also be positively received, in our view.

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Results summary  

MP1 reported a solid 1H20 result. Revenue was up ~70% yoy to $25.9m ($55.2m annualised). Costs grew broadly in-line with revenue and consequently underlying EBITDA was broadly flat yoy at -$12.4m (vs MorgansE of -$12.8m). Free Cash Flow was -$23.9m (vs -$19.1m in 1H19). MP1 ended the year with cash of ~$120m.

On our forecasts the current cash position funds MP1 to the point of being FCF positive.  

Outlook

MP1 have guided to 380 installed data centres by 30 June 2020 (from 300 in June 2019 and 317 in December 2019). This is +80 yoy, a similar add rate as FY19, and again heavily skewed to the 2H. 

CEO, Vincent English, commented ’we will continue to focus on ecosystem development, adding new service providers to our marketplace and integrating with more cloud onramps as cloud providers expand their platforms to new markets.’  

Noteworthy items

North America (NAM) is the largest and fastest growing geography, accounting for 43% of revenue.

From an exit rate perspective, revenue was up 100% yoy and 33% hoh while the gross profit margin expanded to 28%.

MCR2 has delivered a meaningful uplift in revenue per customer and greater traction here, as newly launched Japan lifts, and as new sales hires gain greater traction, should see sales accelerate from current levels. 

We also note a couple of management changes including the CFO moving to an IR role (importantly still at MP1) and the hiring of a Chief People Officer based in the UK. 

Investment view – Add retained

We have reduced our revenue forecasts which reduces FY20 EBITDA by ~5% and FY21 by ~18%. Our DCF based valuation has increased on a lower share count (fewer shares issued in last year’s capital raising than we had forecast).

Management execution has to-date been strong and we continue to back them and a growing addressable market. This said, the key share price risk relates to MP1’s capacity to accelerate the rate of revenue growth. Many steps have been taken to achieve this and we forecast an acceleration, however success is not guaranteed.

Potential ASX200 index inclusion is the next material catalyst.

More information

Morgans clients can login to view our detailed report and share price target for Megaport (ASX:MP1). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer:  Analyst may own 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.

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