Megaport Limited: The writing is on the wall
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 10 February 2022, 11:00 AM
- Sectors Covered:
- Telecommunications, Technology
- Given Megaport Limited (ASX:MP1) released its Q2 last month much of the 1H22 result was known. Additional data points are a net positive with the significant investment in VME and channel (costs layered into 1H22) should drive an acceleration in sales in Q3 and a faster acceleration in sales in Q4 FY22 and beyond.
- Everything about MP1’s result gives us greater confidence that sales will accelerate in Q3 FY22 and beyond, as new products and MP1’s impressive channel partner framework (and channel partners), begins paying dividends.
- MP1 has all the ingredients for greatness but the key question is what is the correct valuation framework to apply, in the context of rising interest rates. We think there is value here but until the macro settles, retain our Hold recommendation.
MP1’s 1H22 result was broadly in line with our expectations. Revenue +42% YoY to $51.2m and Gross profit +69% YoY were in line with ME. GM expanded to 60%, from 50% and this shows the substantial fixed cost leverage in the business.
Operating expenses grow 42% YoY as management invested aggressively in building out its channel partner sales program. Substantial progress was made with the program rolled out in record time period of just 6 months. Returns should follow.
Underlying EBITDA of -$7.3m was a 15% smaller loss than 1H20 and slightly lower than ME -$8. Management expect MP1 to be broadly EBITDA breakeven in FY22.
Capex was 1H loaded and FCF for the half was -$33m. MP1 ended the period with $104.6m of cash so remains well funded, in our view.
1H22 data points support the fact that MP1 has aggressively invested in channel which should drive an acceleration in sales in the coming quarters.
Management noted 5 weeks into Q3 FY22 they have already converted ~50% of the MRR converted in Q2 (all directly). Run-rating this suggests MP1 should add ~$11m ARR in Q3 which would be +50% QoQ and +81% YoY. Q4 should be even better due to conversion of channel partners and proof of concepts (MVE customers and resellers that we nurtured in 1H22). There are 200+ VME customer opportunities.
Channel sales were 32% of MRR Q1, 34% in Q2 and should be higher by Q4.
At 31 Dec 2021 MP1 had a total of 22 additional indirect channel partnerships. SDWAN coverage through channel partners is now ~70% (from ~50% in Q1).
Forecast and valuation update
We have marginally increased our FY22/23 revenue and expense forecasts which results in our EBITDA forecasts decreasing by ~30%, albeit off a low base.
Our DCF based valuation decreases (login to view).
Investment view - Hold retained
We believe in the long term MP1 bull view – with a business model/competitive advantage, structure growth tailwinds, and execution by management all being exceptional. However, we are conscious that inflation and rising interest rates is driving a rotation from growth to value stocks. With this in mind we set our Target price at a 10% discount to our valuation and retain our Hold recommendation.
Longer term fundamentals are strong and successful execution will create upside.
The key share price drivers, interest rates aside, is an acceleration in sales in 2H22 to prove MVE is a large mass marketable solution. We anticipate an acceleration in sales in Q3 FY22 with a more material ramp-up in Q4 FY22 and beyond.
MP1 is a high-growth business and as such is subject to significant share price volatility. This includes a share price highly sensitive to bond yields and inflation. All other KPI’s unchanged, rising interest rates, results in lower valuations.
MP1, like most high growth stocks has suffered a de-rating as the tech sector has been sold off, fighting this macro trend will be challenging in the short term.
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