Megaport: Kicking goals in Q4
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 11 August 2021, 9:25 AM
- Sectors Covered:
- Telecommunications, Technology
- MP1 reported a strong FY21 result with an acceleration in sales notable in Q4.
- The key pieces of new news are 1) MVE pipeline is strong; and 2) MP1 will increase its investment spend organically (and via a small acquisition) in FY22. The MVE pipeline underpins our FY22 sales forecast (+45% yoy vs +35% yoy in FY21). However, we have increased our opex as spend ramps up. This lowers our short-term EBITDA forecasts but drive higher growth in outer years.
- Our DCF valuation increases to $17.71 and we retain our Hold recommendation.
Event: FY21 result
- MP1 reported quarterly result and its KPIs in July so the FY21 result didn't surprise.
- Segmental results show all regions EBITDA positive in 2H21 and the June 21 exit rate margins were - APAC a 47% EBITDA margin; NAM 22% and Europe 42%.
- It was a good result with revenue up 35% yoy to $78.3m. Revenue growth was dampened by a strong AUD. Gross profit grew 43% yoy while the normalised EBITDA loss declined 37% yoy to -$13.2m.
- MP1's statutory loss increased 13% yoy to $55m, with a large portion of this attributed to currency revaluations and expensing staff options.
- From a normalised perspective, MP1 became EBITDA positive in June 21 which was a key milestone.
- Cash burn after operating costs, capitalised items and rent was ~$37m for the year. MP1 had $136m of cash (30 June 2021) and a declining cash burn trajectory.
- MP1 also announced the small, but strategically significant, acquisition of InnovoEdge. MP1 pays ~US$7.5m in cash in 1H22 for this pre-revenue technology firm that will expand MP1's product offering significantly. It is buying smarts.
- InnovoEdge is a “neutral orchestration and visibility platform” which will allow the end customer to run analytics, provisioning and changes to services inside of the cloud. MP1 connects customers to the cloud, InnovoEdge through the cloud.
- Segmental results show that NAM and APAC are now generating double-digit ROEs (excluding head office costs) while Europe is yet to book a profit.
- MP1 guided to increasing its investment in growth. This is expected to see costs grow faster than we had anticipated in 1H22. The result of this sales and development investment is expected to accelerate revenue growth in 2H22.
- There is a large opportunity ahead for MP1 and investing to grow the revenue line is the main focus of management and the investment community.
Forecast and valuation update
- We have increased our investment in growth (opex forecasts) in FY22. We keep our revenue forecast unchanged but the higher opex pulls our normalised EBITDA forecast down from $7m to $3m for FY22 (-60% off a small base).
- Our EBITDA forecast reduces by 60% and 42% respectively in FY22 and FY23, albeit off a small base. The higher sales investment drives outer year upgrades which sees our DCF-based price target increase (Morgans clients login to view).
Investment view: Hold
- We rate management, their track record and the MP1 business model highly. That said, we would prefer to add to MP1 positions on any share price weakness and so maintain a Hold recommendation at this stage.
- Q1FY22 is released on Thursday 21st October.
- Key share price drivers will be data points supporting an acceleration in sales in FY22 and proving there is healthy customer demand for MVE.
- MP1 is not yet a cash generative business and needs to grow revenue to reach this point. With $136m of cash at bank (30 June 2021), MP1 has ample runway.
- MP1 is a high-growth business and, as such, is subject to significant share price volatility. This includes a valuation highly sensitive to bond yields and inflation.
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