Company Overview: Megaport Limited (ASX: MP1) is engaged in offering Elastic Interconnection services. The company uses Software Defined Networking (SDN) services, through which MP1 enables its worldwide customers to quickly connect their network to other services across the Megaport Network. These services can be wholly monitored by customers via mobile devices, computer, or the company’s open API. The company has greater than 1,842 customers and connect the same to around 700 enabled data centres globally.

MP1 Details

Robust Customer Base & Strategic Alliances Aid MP1:  Megaport Limited (ASX: MP1) is an Australia based elastic interconnection services company with a market capitalisation of ~$1.87 billion as on 19 March 2021. Over the last few years, the company has grown tremendously and has become a fundamental part of how organisations manage their workload in the cloud economy. Today the company has over 1800 customers, ranging from small and medium enterprises to Fortune 500 companies. Few of the top partners and customer of Megaport include Alibaba, Amazon, Google, IBM, Microsoft, Nutanix, Oracle, Salesforce, SAP, Disney, etc. The goal of the company is to offer a platform that makes it simpler for businesses to connect to the digital services they require. Notably, in December 2020, the company had ~2,043 customers across 716 Enabled Data Centres in 130 cities across 23 countries. These customers recorded a monthly recurring revenue (“MRR”) of ~$6.3 million.

Key Major Customers (Source: Company Reports)

Over a period of 2 years, starting from 1HFY19 to 1HFY21, the company has reported revenue CAGR of 53.9% with revenues in 1HFY19 and 1HFY21, amounting to $15.2 million and $36 million, respectively. The company remains focused to expand its network into new markets and data centres. Going forward, with its cloud-based partnerships and ever-increasing on-ramp density, MP1 aims to aid customers and partners to deploy and scale their hybrid cloud, multi-cloud, and direct cloud-to-cloud connections quickly and easily.

Revenue Trend (Source: Company Reports)

In the second half of FY21, the company aims to unveil Megaport Virtual Edge (MVE). The company also remains on track to provide a virtualised network functionality platform to enable businesses to connect to services via Megaport from different places worldwide. The company has partnered with Cisco, which is the first technology partner to integrate MVE. In 1HFY21, MP1 won an ISO/IEC 27001 certification from the International Organization for Standardization (ISO), depicting a key milestone of the company’s overall systems and processes.

1HFY21 Key Financial Highlights for the Period Ended 31 December 2020: During the period, the company reported total revenues of $36 million, an increase of 39% year over year. In 1HFY21, MP1 remained on track to drive consistent growth across all key metrics, including Customers, Ports, monthly recurring revenue (MRR), the number of Installed Data Centres, and Services. Total monthly recurring revenue for the period stood at $6.3 million, up 37% year over year. Total Installed Data Centres for the period increased 22% on pcp and came in at 386. The company witnessed robust cloud partnerships and remains focused on continuous execution, network expansion, and achieving operational goals. During the period, the company recorded a profit after direct network costs of $18.2 million, depicting an increase of 38% year over year. The company reported a net loss of $38.4 million in 1HFY21.

1HFY21 Key Highlights (Source: Company Reports)

Revenue by Geography: In 1HFY21, revenues from North America grew a whopping 51% year over year and came in at $17.2 million. North America being a high-growth region, the company continued to make higher investments, which depicts a significant market opportunity for MP1. As of 31 December 2020, total numbers of installed data centres in North America stood at 184, up from 174 reported at the end of 30 June 2020. Coming to the Asia Pacific region, revenues increased 31% year over year and came in at $12.3 million. As of 31 December 2020, total numbers of installed data centres in Asia Pacific stood at 97, up from 87 reported at the end of 30 June 2020. Whereas revenues from Europe came in at $6.5 million, up 30% year over year. As of 31 December 2020, total numbers of installed data centres in Europe stood at 105.

Geographical Contribution (Source: Company Reports)

Healthy Balance Sheet and Decent Liquidity: The company has built a decent balance sheet position with cash and cash equivalents of $144.8 million. Total debt at the end of the period amounted to ~16.5 million. Net cash used from operating activities came in at $4.9 million for the period ended 31 December 2020 as compared to a net outflow of $11.5 million reported in the year-ago period. The period also saw record cash receipts, amounting to $43.1 million, up from $25.3 reported in the year-ago period. The company’s healthy balance sheet and skilled management team along with its long-term nature of customer relationships place the company for considerable long-term growth.

For 1HFY21, the company reported current ratio of 5.93x, higher than the industry median of 2.56x. In 1HFY21, the company’s cash cycle days stood at 51.8 days as compared to 2HFY20 cash cycle days of 54.9. Debt to equity ratio of the company in 1HFY21 stood at 0.09x, lower than the industry median of 0.25x.

Growth Profile and Profitability Metrics (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 39.51% of the total shareholdings, while the Top 4 constitutes the maximum holding. Slattery (Bevan Andrew) is the entity, holding maximum shares in the company at 7.71%. Capital Research Global Investors is the second-largest shareholder, with a holding of 7.48%, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group  

Issued 50k Ordinary Shares: On 19 March 2021, the company issued 50,000 fully paid ordinary shares, following the exercise of an equivalent number of options in MP1 issued under its employee share option plan.

Risk Analysis: The COVID-19 global pandemic has caused major disturbance to operations in some businesses and sectors, thus resulting in volatility in financial markets. These disruptions along with stiff competition in the markets where MP1 operates and regulatory concerns, may dampen financial performance. Further, foreign currency fluctuation risks and government restrictions add to the woes. The company is exposed to the risk related to breach of information security that could result in loss of customers and revenue and could adversely affect the company’s future financial performance.

Outlook: Based on the positive EBITDA results of all the three operating segments of MP1, it expects to remain on track in order to attain EBITDA breakeven on an exit run-rate basis in FY21. The company expects to unveil Megaport Virtual Edge on March 31, 2021. Currently, the company’s MVE is deployed to 11 metros globally, and it aims to add 10 more metros by the end of FY21. The company also expects to expand its total addressable market and drive more uptake of Megaport services via its Technology Partner pipeline for MVE, thereby providing more choices to its customers. The company opines that with its innovative product suite and investments, it can position itself well to drive more business through its partnerships program worldwide. The company’s business has proven to be resilient to the impacts of COVID-19, owing to its robust customer base & strategic alliances.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last three months, the stock went down by ~21.01%. The stock made a 52-week low and high of $6.56 and $17.67, respectively, and is currently trading below the average of its 52-week trading range. On the technical analysis front, the stock has a support level of ~$9.403 and a resistance level of ~$14.793. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company might trade some premium to its peer average EV/Sales multiple, considering its decent, top-line performance, robust customer base, decent cash position and encouraging outlook. We have taken peers like NEXTDC Ltd (ASX: NXT), Afterpay Ltd (ASX: APT) to name a few. Considering the above factors, strategic alliance, rising number of key customers, decent 1HFY21 financial performance, increasing total Installed Data Centres, and positive long-term outlook, we give a “Buy” recommendation on the stock at the current market price of $11.84, down by 1.169% on 19 March 2021.  

MP1 Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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