Riding the Cloud

Ord Minnett has initiated coverage of NEXTDC with an Accumulate recommendation and a target price of $8.00. NEXTDC operates within the data storage segment, a growth area that stands to benefit from continued secular growth in cloud computing, IT outsourcing and increasing data usage. The company has best-in-class facilities in an industry with high barriers to entry, and has financing in place for the build-out of its second-generation data centres.

 

NEXTDC operates eight data centres in Brisbane, Sydney, Melbourne, Canberra and Perth – with three more in the planning stage – and provides data centre co-location services, infrastructure management, professional services and connectivity services. Its customers include enterprises, cloud services providers, telco operators, IT service providers, government agencies, and small to medium businesses. Customers are typically charged under service agreements by a measure of space (rack, pod, cage or suite, square metre) and measure of power (kilowatt or kilovolt-ampere).

 

We estimate revenue growth will accelerate to 27–28% year-on-year in FY20–21 from 18% in FY19, as growth at hyperscale cloud operators AWS, Azure and Google Cloud outstrips the available supply of data centre capacity.

 

NEXTDC has achieved a low- to mid-20% internal rate of return (IRR) on its first-generation data centres in Sydney, Melbourne and Brisbane. We estimate second-generation data centres will achieve a mid-teen to 20%-plus IRR despite being many times larger with a higher proportion of wholesale customers. These appear to be favourable returns when compared to its weighted average cost of capital (WACC) of 9.4%.

 

As highlighted by recent acquisitions of Metronode by Equinix, Ascenty by Digital Realty and Zenium by CyrusOne, and CyrusOne’s strategic partnership with GDS, US data centre operators are expanding globally to meet customer demand. With long construction lead times and difficulty in securing prime metro real estate, it makes more sense for these operators to acquire rather than build. We expect this trend to drive further mergers and acquisitions, which should benefit NEXTDC.

Ord Minnett Research Trial

We invite you to sign up for a three month trial of our Ords Monthly investment newsletter. This report includes our latest opinions, research and share market insights that may enhance your current portfolio structure.