These NEXTDC's build competitive advantage

About the author:

Author name:

By Nick Harris

Job title:

Senior Analyst

Date posted:

28 February 2022, 10:25 AM

Sectors Covered:

Telecommunications, Technology

• NXT's 1H22 result was ahead of our forecasts and came with a small upgrade to FY22 guidance. Noteworthy was the ~8% upgrade to capex guidance which bodes well for future growth. NXT typically builds only what they have line of sight to leasing; including recently announced gen 4/5 regional/edge sites in smaller cities.
• Based on the mid points FY22 revenue guidance has been upgraded 1%; EBITDA guidance upgraded by 1.5%; and capex guidance upgraded by 9%.
• Minor changes to our forecast, (Morgans clients login to view target price) and Add retained.

Event: 1H22 result

Revenue +19% YoY to $144.5m (ME $143.2m); EBITDA +29% YoY to $85m (ME $80m); and capex +46% YoY to $266m (ME $209m).

FY22 guidance upgraded marginally and sales pipeline momentum is incredibly strong. Revenue of ~$293m (up 19% YoY); EBITDA of $165m (up 23% YoY) and capex of $555m (up 50% YoY). NXT's EBITDA margin expanded to 59% in 1H22 and will dip back down to 56% in FY22 (from 55% in FY21). The volatility reflects costs of new facilities S3/M3 starting to come through in 2H22 and 1H23.

Analysis: gap between contract and billing drive short term growth

As we expected most the Revenue & EBITDA growth in 1H22 (as well is 2H22 & FY23) comes from NXT narrowing the gap between contracted and billing MW.

At 1H21 (technical Jan 2022) MW contracted were 81MW (+5.6 HoH and +10.1 YoY). MW billing were 68 (+4.6 HoH and +9 YoY). With the 13MW contracted but not yet billing, this could add, roughly a further ~$50m of revenue and ~$35m of EBITDA without NXT signing any new contracts.

We expect significant contract wins. Capex upgrades suggest management does as well as they pointed to zero short term inflation impact and tight contracts.

M3 (which goes live in 1H23) has had a 4.5MW upgrade to planned capacity (was 13.5MW but now adding 4.5MW to the initial fit-out). Broader market expectations are for NXT's MW's contracted to edge closer to 20MW pa as M3 and S3 come online. MW planned for M3 suggest this is looking likely. S3 and M3 builds are tracking to plan (on time and on budget which is a great outcome).

In November 2021, NXT completed an upgraded debt refinancing, bringing total fire power to $2.5bn (across four tranches). The base of this is an $800m Term Loan and the remaining 3 parts are subject to further conditions. Eg capex facility is drawable against T1 customer contracts. NXT's funding position is strong.

Details have been provided on regional or edge sites across Darwin, the Sunshine Coast and Adelaide. These plus upgraded fit-outs in existing DC's, explain the upgraded capex. This is not inflation related and is clearly a positive leading – NXT do not typically build material DC equipment without customers demand.

Forecast and valuation update

We make minor forecast adjustments.

Investment view

We retain our Add recommendation and highlight that NXT remains our preferred pick given substantial structural growth, quality management, significant barrier to entry and, in our view, improving competitive advantage with regional/edge sites.

We see a clear pathway for long-term growth, substantially higher EBITDA and material free cash flow, over the medium term.

Price catalysts

• Large ongoing sales (more contracted MW's are likely as S3 and M3 turn on).
• The massive structural growth of Cloud and digitisation continues to require significant digital infrastructure. NXT is a key supplier at the forefront of this trend. In our view, this means there is a high likelihood of CSP options getting exercised. These in aggregate are material in size, ~50MW+. The probable exercise of some or all of these options unpins substantial earnings growth potential for NXT.

Risks

• Execution (construction, uptime, time to fill facilities), interest rates, competitive environment, and return on capital (relative to market expectations).

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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.