NEXTDC Limited

Decent FY19 Financial Performance: NEXTDC Limited (ASX: NXT) is an independent data centre operator, primarily involved in the establishment, development and operation of data centre facilities. During the financial year ended 30 June 2019, the company’s revenue from continuing operations increased by $23 million or 15% to $179.3 million as compared to last year, driven by significant growth in the number of customers, customer orders and increased utilisation of data centre services across the business. The company reported an underlying EBITDA of $85.1 million, up by 22.5 million in the last year. As at 30 June 2019, the company had cash and cash equivalents of $399 million. The growth in data centre revenue and the underlying EBITDA is depicted in the below graphs.


Data Centre Services Revenue and Underlying EBITDA (Source: Company Reports)

Reduced Operating Costs via Property Acquisitions: The acquisitions of the land and buildings at P1, M1, S1 as well as B1 are expected to deliver rental savings of around $15 million per annum in FY19 and will strengthen the company’s balance sheet while providing control of the underlying properties.

Rise of Hyperscale Data Centres: With the evolution of Customer IT, the global market for hybrid cloud is expected to reach a value of $138.6 billion by 2023. Leading research and advisory firm, Gartner Inc., has predicted that 80% of the organisations will shift their workloads to colocation and cloud-based computing models by 2025. It is expected that Australia’s Managed Cloud services industry will expand to USD 1.2 billion in FY19.

NXT Well Capitalised for Future Growth: In FY19, the company raised $500 million in the form of Notes IV and Notes IV-2. In addition to this, the company has also refinanced its $300 million syndicated senior debt facility during FY19.
FY20 Outlook: In FY2020, the company is expecting solid growth in recurring data centre services revenues, underpinned by long-term customer contracts. As a result of this, the company expects it FY20 revenue to be between $200 million to $206 million, demonstrating a growth of 12% to 15% on FY19. Underlying EBITDA is expected to be between $100m and $105m, representing growth in the range of 17% - 23%.

Recommendation: The stock of the company generated returns of 2.15% and 3.27% over a period of the months and six months, respectively. The company has a significantly higher current ratio of 7.04x as compared to the industry median of 2.81x, suggesting that the company is well placed to meet its short-term obligations and has enough headroom to invest in growth opportunities. Considering the company’s decent financial, capital and liquidity position, expected boost in hyperscale data centres industry and a favorable outlook, we give a “Buy” rating on the stock at the current market price of $6.390, down by 3.765% on 20 November 2019.
 

EML Payment Limited

PFS acquisition to Complement EML’s Earnings: EML Payment Limited (ASX: EML) provides secure payment solutions that connect businesses to their customers. The company is currently in the process of acquiring Prepaid Financial Services (Ireland) Limited (PFS), multi-award winning European provider of white label payments and banking-as-a service technology, which operates in 24 countries and supports over 26 currencies. The acquisition is estimated to be mid-teen EPSA accretive in FY20 on a pro forma basis, before synergies and will increase EML’s financial scale and operating leverage while driving additional growth by adding new products to EML’s portfolio.

Strong Support from Investors: As announced on 13 November 2019, EML has raised around $67 million through an Institutional Placement, which received strong demand. Furthermore, the company has raised around $89 million in the Institutional Entitlement Offer, with a strong take up rate of approximately 90% by eligible institutional shareholders. Proceeds from the placement and Institutional Entitlement Offer will be used to fund the PFS acquisition and its transaction cost.

Strong FY19 Financial Performance: In FY19, the company reported Gross Debit Volume (GDV) of $9.03 billion, up 34% on prior year, driven by Gift & Incentive (G&I) and Virtual Account Numbers (VANs) segments. Further, the favourable segment and program mix, drove group revenue conversion to increase by 3bps to 105bps. During the year, the company saw record revenue growth in all segments through organic and acquisition growth, taking the total revenue for FY19 to $97.2 million, up 37% on last year. In the last five years, the company’s EBITDA witnessed a CAGR growth of 82%. In addition, the company’s net margin has improved from 3.1% in FY18 to 8.7% in FY19.


Track Record for Growth (Source: Company Reports)

FY20 Guidance: Revenue for the year is expected to be in the range of $116 million – $132 million. EBITDA is likely to come in the range of $38.5 million – $42.5 million. NPATA is forecasted to come in the range of $26.2 million – $29.4 million. Operating cash flow for FY20 is expected to be around 70% – 80% of EBITDA.

Stock Recommendation: EML has a ROE of 6.2%, significantly higher than the ROE of 1.8% in FY18, demonstrating the company’s increased focus on providing returns to shareholders. Notably, in the last six and three months, EML stock has generated returns of 97.97% and 42.77%, respectively, indicating increased market confidence in EML stock. At a current market price of $4.350, EML’s stock is trading near to its 52-week high of $4.690. Considering the company’s move to acquire PFS, decent financial performance in FY19, increased focus on shareholders’ return and current trading levels, we give a “Hold” rating on the stock at the current market price of $4.350, down by 1.136% on 21 November 2019.

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