We look for companies with the potential for strong earnings growth, operating in an industry which is itself growing, a clean balance sheet, and management who are founders or have considerable skin in the game. We then like to buy those companies at attractive prices. The Growth and Dividend funds have recently taken a position in Macquarie Telecom Group Limited (ASX:MAQ), a company which we believe to have all these characteristics. Macquarie provides telecommunication and hosting services to corporate and government customers in Australia. Telco has been relatively flat, but hosting continues to experience strong growth driven by the mega trends of cyber security and cloud services.

In 2016, the Australian public cloud market increased 14.4%. This growth is forecast to continue, with Australian data centre revenues forecast to increase at a CAGR of 12% until 2021. Importantly, there is forecast to be a supply deficit in Australia in the next three years with new DC capacity in Sydney and Melbourne of 200MW vs. estimated hyper-scale cloud demand of 200 – 305MW.

Macquarie has invested over $230 million of capex over the last six years in new data centre capacity providing it with considerable operating leverage. For example, in FY17, hosting revenue was up 21% on pcp to $77.5 million with EBITDA up 55% on pcp to $21.6 million as hosting margins increased from 21% to 28%.

The growth in earnings generated operating cashflow in FY17 of $41.4 million and allowed MAQ to increase its cash position to $31 million (no debt) despite reinvesting over $38 million in the business during the year.

Having founded the company in 1992, brothers Aidan and David Tudehope remain highly engaged in the business and lead the company as CEO and MD of hosting respectively, retaining 61% of MAQ with a personal holding worth $189 million.

We believe that MAQ is trading 6x-7x FY18 EV/EBITDA, which means the market does not appear to be placing any value on MAQ’s unutilised hosting capacity. Other data centres operators (e.g. ASX:NXT) are trading well above this level and, on this basis, we consider that MAQ is presently undervalued.

MAQ doesn’t have any covered research, so it flies off the radar of the broader investment community. However, given the potential for strong growth, latent earnings capacity and disparity in valuation to listed peers, we believe that it’s only a matter of time until MAQ is re-rated.



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