Company Overview: A technology-based company, NEXTDC Limited (ASX: NXT), is engaged in developing and operating independent data centers in Australia. The company enables business transformation through data center outsourcing solutions, connectivity services and infrastructure management software. It is an ASX 100-listed technology company, comprising over 730 carriers, cloud providers and IT service providers.

NXT Details

NXT Rides on Customer Wins & Encouraging Outlook: The company is eyeing revenue growth, backed by an increase in recurring data centre services revenues, boosted by long-term customer contracts. In addition, it expects to report continued growth in interconnections with the rising demand for connectivity solutions.

Historical Performance; Analysis by Kalkine Group

Spotlight on 1HFY22 Results:

• Robust Top Line Performance: In 1HFY22, the company witnessed a rise of 19% year over year in its Data centre services billing, which came in at $144.5 million. Further, contracted utilisation and interconnections increased by 14%, respectively, on a year over year basis. The rise can be attributed to decent ecosystem enhancement and higher recurring monthly revenue.
• Robust Customer Base: The company witnessed a decent increase in the number of customers on its platform during the year. The number of customers went up by 144% to 1,569 compared to 1,425 customers as of 31 December 2020.
• Strong Operating Metrics: Underlying EBITDA came in at $85 million, up 29% on the previous year. Notably, second-generation facilities continue to drive scale and earnings growth. The company invested in growth platforms, new locations and land expansion. Profit after tax for the period amounted to $10.3 million, compared to a loss of $17.8 million in 1HFY21, underlining the intrinsic operating leverage of NXT.
• Liquidity Position: At the end of the period, liquidity amounted to $2.12 billion, including cash and undrawn debt facilities. NXT generated an operating cash inflow of $69.5 million in 1HFY22, up from $63.64 million reported in 1HFY21. At the end of the period, cash equivalents amounted to ~$725 million.
• Key Developments: During the period, some of the development initiatives, including S3 Sydney building construction, with practical completion of the stage 1 development, is expected in 2H22. In addition, 3.0MW of expansion capacity was installed at M2 Melbourne, and an additional 4.5MW of power was brought forward at M3 to support early customer contracted requirements.

Key Trends; Analysis by Kalkine Group

Recent Update: Recently, the company announced that Jennifer M Lambert, a director in the company, has acquired 6,000 fully paid ordinary shares for a consideration of $10.67 per share.

Key Metrics: In 1HFY22, the company had a gross margin of 79%, up from 75.5% in the prior year's gross margin and higher than the industry median of 69.9%. This indicates that the company is making a reasonable profit on sales by keeping the costs in control. EBITDA margin for the company stands at 57.6% in 1HFY22, up on the prior corresponding period margin and the industry median of 55.6% and 25.2%, respectively. Coming to the business's liquidity, the company's strength is depicted in the current ratio of 13.33x, which is much higher than the industry median of 2.41x.

Profitability; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 25.62% of the total shareholdings, while the top 4 constitute the maximum holding. The Vanguard Group, Inc. held the maximum number of shares with a percentage holding of 5%, followed by Unisuper Limited holding of 4.99%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group

Risk Analysis: The company faces the risk of technological changes, delays in project installations due to COVID-19. Further, stringent regulations, stiff competition, integration risk and foreign currency fluctuation risks may have a denting effect on the company’s agility, innovativeness, and ability to compete efficiently. This apart, companies’ constant attempts to strengthen customer base and expand supply-chain network involve heavy investments – which again comes at the expense of margins.

Outlook: NXT has marked a strong start to FY22 and is on track to deliver decent growth in revenue and EBITDA. The company expects to see a continued increase in demand in the data centre industry and is planning for investment in new infrastructure to bring on the additional capacity to support customers’ growth requirements.

The company has upgraded its FY22 outlook, and now expects to report Data centre services revenue between $290 million and $295 million, up from the prior view of $285 million and $295 million. Revenue in FY22 will reflect contribution from long-term customers’ contracts, providing decent recurring data centre services revenues and continuous growth in connectivity solutions. Underlying EBITDA for the year is now expected to be between $163 million and $167 million, up from the prior view of $160 million and $165 million. Capital expenditure for the year is expected to be in the range of $530 million - $580 million.

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

Source: 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: The stock of the company has been corrected by ~22.78% in the past six-months. Currently, the stock is trading below the average of its 52-week high and low levels of $14.085 and $9.74, respectively. The stock has been valued using an EV/EBITDA multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium as compared to its peers, considering an increase in customers, data centre services demand, revenue in 1HFY22, and upgraded guidance for FY22. For valuation, a few peers like Bravura Solutions Ltd (ASX: BVS), Xero Ltd (ASX: XRO), Iress Ltd (ASX: IRE), and others have been considered. Considering decent liquidity position, rise in top-line, positive outlook on the back of long-term customer contracts and future growth prospects underpinned by a robust industry outlook, robust customer base, current trading levels, and indicative upside in the valuation, we recommend a ‘Buy’ rating on the stock at the current market price of $10.69, as on 4 March 2022, 11:45 AM (GMT+10), Sydney, Eastern Australia.

NXT Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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