Stocks’ Details

NEXTDC Limited

Increase in Contracted Commitments: NEXTDC Limited (ASX: NXT) is involved in the establishment, development and operation of data centre facilities. The market capitalisation of the company stood at ~$4.97 Bn as on 15^th July 2020. Recently, the company announced that contracted commitments at its NSW data centre facilities have increased by around 4MW, to over 36MW. The company added that the contracted customer commitments plus expansion options at its NSW data centres are now approaching 60MW. Revenue recognition for these new contracted commitments is likely to start during FY21, after completion and commissioning of the associated data halls. The company has also completed equity raising comprising share purchase plan of $191 million and a $672 million fully underwritten institutional placement. This equity raising will provide flexibility to maintain momentum in its growth agenda.

Sources and Use of Capital Raised (Source: Company Reports)

Guidance: For FY20, the company expects revenue in the range of $200 million to $206 million and Underlying EBITDA between $100 million and $105 million.

Key Risks: The company is mainly exposed to business related risks which may affect its prospects for future financial years. These include customer demand, development of data centers, business funding and customer requirements. The company’s operations are also sensitive to credit risk, which arises from the default of counterparties on their contractual obligations.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Current ratio of the company stood at 3.42x in 1H FY20 as compared to the industry median of 2.01x. This indicates that the company is in a decent position to address its short-term obligations. We have valued the stock using a P/CF multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers such as WiseTech Global Ltd (ASX: WTC), Appen Ltd (ASX: APX), etc. Therefore, considering the recent capital raising, expansion in contracted commitments and decent liquidity position, we give a “Hold” recommendation on the stock at the current market price of $11.050 per share, up by 1.283% on 15^th July 2020.

Class Limited

Decent Growth in Operating Revenue: Class Limited (ASX: CL1) is a provider of cloud-based self-managed superannuation fund administration software solution and services. The market capitalisation of the company stood at ~$165.11 Mn as on 15^th July 2020. During 1H FY20, the company reported operating revenue amounting to $20.5 million with a rise of 8% on pcp and product investment for the period stood at $5.5 million with a rise of 25%. The company added that the work on Class Trust is progressing well. Previously, the company announced the acquisition of NowInfinity, which is highly complementary to the Class offering.

Financial Highlights (Source: Company Reports)

Strategy: The company continues to explore opportunities to build its partner and alliances program to align with its Reimagination Strategy, comprising growth in existing products, growth in new products & markets, and identifying strategic acquisition and partnership opportunities.

Key Risks: The company is exposed to credit risk, which arises from the default of the counterparties on their contractual obligations. To mitigate this risk, the company obtains guarantees. Moreover, the Group manages liquidity risk by maintaining adequate cash reserves by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. 

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company’s underlying business remains solid, on the back of investments in FY20 to position the company for accelerated growth in FY21 and beyond. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Over the Wire Holdings Ltd (ASX: OTW), Praemium Ltd (ASX: PPS), etc., and arrived at a target price of low double-digit upside (in percentage terms). Hence, considering the investments strategy for accelerated growth in FY21 and beyond, decent performance in 1H FY20 and key risks, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.325 per share, down by 1.487% on 15^th July 2020.

RXP Services Limited

Refinancing of Debt Facilities: RXP Services Limited (ASX: RXP) is a provider of digital consulting services. The market capitalisation of the company stood at ~$48.33 Mn as on 15^th July 2020. On 23^rd March 2020, the company recently notified the market that it has successfully refinanced its $25 million interest-only general facility with Westpac, with the loan maturity being extended to March 2023. The company’s operations and financial performance did not see any material impact from COVID-19 upto the date of the announcement. During 1H FY20, the company reported revenue amounting to $65.1 million and Underlying EBITDA of $6.7 million.

Key Financials (Source: Company Reports)

Priorities for FY20: The company’s priorities for FY20 revolve around building out its creative capability in Melbourne, strengthening its human centered design (HCD) capabilities in Sydney and improving its AI and Data Science capabilities. H2FY20 is expected to be a period of increased revenue and earnings, with significant wins worth >$25 million, closed out across a range of sectors.

Key Risks: The company expects that COVID-19 situation and associated responses are evolving quickly, and the uncertain economic outlook could potentially create some challenges going forward. The company’s business is exposed to a variety of financial risks such as interest rate risk and liquidity risk. Interest rate risk arises due to fluctuation in fair value or future cash flows of a financial instrument because of changes in market interest rates. Liquidity risk is influenced by the difficulty in meeting obligations associated with financial liabilities.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Gross margin of the company stood at 93.6% in 1H FY20 as compared to the industry median of 71.9%. We have valued the stock using the P/E multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Citadel Group Ltd (ASX: CGL), Class Ltd (ASX: CL1), etc., and arrived at a target price of low double-digit upside (in percentage terms). Thus, considering the expectations for H2FY20, FY20 priorities and key risks stated above, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.285 per share, down by 5% on 15^th July 2020. 

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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