Megaport Limited: Channelling their energy into growth

About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
20 January 2022, 12:30 PM
Sectors Covered:
Telecommunications, Technology

  • Megaport Limited's (ASX:MP1) Q2 result was in line with our expectations for revenue while cash costs were ahead of our expectations. There were, however, a number of one-off costs and timing differences in the Q2 expenses. Some of cash costs will be spread across the entire FY22 P&L while others will be capitalised.
  • Q1+Q2 cash account suggests a -$15m EBITDA loss in 1H22 but this won’t be the case when the P&L is printed. That said, we have still increased our expense forecasts, albeit marginally.
  • Overall, we were happy with MP1’s Q2. While there was no single “wow” moment in the accounts, collectively they show KPI’s are heading in the right direction and reinforce that MP1 has invested heavily in 1H22 to deliver an acceleration in sales in Q3 but more so Q4 FY22. Channel and VME grew as a percentage of ARR.
  • After forecast changes we retain our Hold and set our target price at (login to view).

Q2 FY22

There was no single standout item from this quarterly but collectively all KPI’s are pointed in the right direction and this was a strong all round quarter from MP1.

Customer adds and port adds were above the trailing LTM average and bodes well for ARR growth accelerating in Q3. MVE’s grew by 12 in the quarter which was lower than the street anticipated, although we suspect much of this is timing.

Annualised Recurring Revenue (ARR) grew by A$7.8m in the quarter or an annualised growth rate of 47% to A$110m (vs ME $108m).

Operating costs was also ahead of our forecasts while MP1 ended the period with $105m in cash. There are some timing issues with Q2 cash costs. When MP1 releases its 1H22 result on 9th February 2022, we will be able to see a clearer picture.

Focused on channel \ indirect partners growing sales

Q1 & Q2 data points support the fact that MP1 has aggressively invested in channel which should drive an acceleration in sales in the coming quarters.

MRR from direct and indirect sources is now disclosed. Indirect has been 32% of MRR for the last 3 quarters but increased to 34% in Q2FY22. All going to plan with the ramp-up of indirect sales, this should progressively grow, and accelerate as a percentage over Q3/Q4FY22. See overleaf for more sale mix details.

MRR from MVE was 0.4% in Q4FY21, 0.8% in Q1FY22 and 1.6% in Q2 FY22.

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 increased our revenue and cost forecasts in FY22 marginally and more materially in FY23/24. Our target price reduces from (login to view).

Investment view – Hold retained

We believe in the long term MP1 bull view – with a business model, structural growth, and management’s execution all very strong. However, we are also conscious of the negative impact from rising interest rates. This is driving a rotation from growth to value stocks. Longer term, and assuming successful execution, we see significant upside. However, for now we retain our Hold recommendation.

Price catalyst – sales acceleration

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 anticipated an acceleration in sales in Q3 FY22 with a more material ramp-up in Q4 FY22 and beyond.

Risks

MP1 is not yet a cash generative business and needs to grow revenue to reach this point. With $105m of cash at bank, at 31 Dec 2021, MP1 has ample runway.

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, result in lower valuations.

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Disclaimer: 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.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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