NextDC - More of the same is a good thing

Morgans Financial Limited

NEXTDC's 1H17 result was better than expected on both a reported and underlying basis. Guidance was reiterated and we see more upside than downside risk. B1 is now 94% full and shows a 25% ROIC after corporate overheads. In our view, this shows that NEXTDC is investing wisely, and assuming this looks maintainable - which seems the case to us - more builds are a good thing.

New facilities are on track (B2 and M2 by 2H17 and S2 by 1H18), and while no pre-sales were mentioned, the pipeline has grown by over $100m in the last six months alone.

Results snapshot

Revenue was up 39.6% yoy to A$58m and 3% ahead of our forecast. Operating costs (excluding power) dropped by nearly 10% yoy to A$25m. This is despite NXT adding costs ahead of new facility builds and adding one-off costs around its inflight technology transformation program. This means underlying costs are down a meaningful amount as NXT improves its overall operating efficiencies.

Revenue growth of 40% dropped through to 110% EBITDA growth and EBITDA margins expanded from 27% to 41% yoy. This high fixed cost leverage is the attractive thing about data centre investment.

Noteworthy or interesting items

NXT reiterated FY17 guidance and simply doubling 1H17 would see NXT at the mid-point of this guidance. In 2H17 NXT will have additional operating costs ahead of B2 and M2 going live which will drag reported EBITDA lower but there should still be some 2H EBITDA growth. This makes us confident that FY17 guidance is in the bag, perhaps with some upside risk.

B2 and M2 are due to go live at the end of 2H17. S2 is due to go live at the end of 1H18 with NXT now having contracted a site (subject to development approvals).

B1 case study shows NXT is an impressive investment

B1 is NXT's first data centre so we think it's a good case study on what returns we can expect from a full facility. Some will argue that since it's largely retail it's not a fair indicator of the larger purpose-built retail/whitespace facilities. We think it is, as the revenue to capex ratio and the cost to run a facility are broadly similar to all other facilities.

Allocating 5% of corporate overhead costs to B1 (since its 2.25/43MW) shows B1 has generated a 24-25% ROIC per annum for the last three half yearly periods. Of course P1 and C1 are dragging returns down but there is clearly upside risk.

Investment view

We make immaterial changes to our forecasts (<5% at the EPS level). We have rolled forward our DCF based valuation which now accounts for 75% of our weight valuation. We now include an FY18F EV/EBITDA valuation which accounts for the other 25%.

We increase our share price target and retain our Add recommendation.

By Nick Harris, Senior Analyst - Telecommunications, Technology and Financial Services. Original blog here: (VIEW LINK)


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