NEXTDC Limited

NXT Details

Key Takeaways from 1HFY21: NEXTDC Limited (ASX: NXT) is a data centre solutions provider and operates nine data centres in Australia. As of 15 July 2021, the market capitalisation of NXT stood at ~$5.43 billion. On 2 July 2021, NXT announced that Vanguard Group holds 4.902% in the company and has ceased to be a substantial shareholder as of 24 June 2021.

• Increase in Revenue: The company posted revenue growth of 27% YoY in data centre services to $124.46 million in 1HFY21 due to the increased customers (16% YoY) and contracted utilisation (33% YoY) in 1HFY21. COVID-19 has also acted as a demand driver for technology firms and digital services.
• Increase in Underlying EBITDA: The underlying EBITDA increased by 29% YoY to $65.74 million in 1HFY21.
• Increase in Operating Cash Flows: NXT generated an operating cash flow of $64.1 million in 1HFY21, up by 219% YoY.

Revenue & Net Income Trend from FY16-FY20; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of upgradation required to cope with the adoption of new technologies in power & cooling systems and engineering. NXT is exposed to the risk of regulatory changes and low customer demand.  

Outlook: The company now expects the data centre services revenue to be between $246-$251 million versus the previously stated range of $242-$250 million in FY21. DCC’s Underlying EBITDA is estimated between $130-$133 million compared to $125-$130 million provided guidance for FY21. The capital expenditure guidance remains the same between $380-$400 million for 2021. The guidance has been upgraded due to the robust sales in 2HFY21 and expected demand for data centre services (premium) in FY22.

Valuation Methodology: EV/Sales 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 NXT gave a negative return of 9.97% in the past nine months and a positive return of 9.41% in the past year. The stock is currently trading slightly above to the 52-weeks’ average price level of $10.060-$14.100. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount than its peer average, considering the increase in net loss after tax and upsizing senior debt by $350 million in 1HFY21 and the related financial, technological, and regulatory risks. For this purpose, we have taken peers like Altium Limited (ASX: ALU), Megaport Limited (ASX: MP1), Afterpay Limited (ASX: APT) and others. Considering the current trading levels, increase in customers, data centre services demand, and revenue in 1HFY21, upgraded guidance for FY21, valuation, we give a ‘Hold’ rating on the stock at the closing price of $12.090, up by 1.596% as of 15 July 2021.

NXT Daily Technical Chart, Data Source: REFINITIV   

DigitalX Limited

DCC Details

Business Update: DigitalX Limited (ASX: DCC) is a technology and investment firm focused on blockchain consulting and digital asset funds management. DCC is also engaged in commercialising Drawbridge, a RegTech solution to aid listed companies in managing their governance and compliance policies. As of 15 July 2021, the market capitalisation of DCC stood at ~$39.94 million. On 13 July 2021, DCC reported $22.26 million of bitcoin and digital asset holdings and $22.14 million of total funds under its management as of 30 June 2021. Since inception, the company’s bitcoin fund has provided a return of 356.61%. DCC will release the Q4FY21 activities report by the end of July 2021, including updates on its Funds Under Management business.

$8.33 Mn Revenue Recognised: On 29 June 2021, DCC notified ASX of an increase in revenue by $8.33 million in June 2021 and an equal estimated increase in its digital asset holdings. This revenue recognition is due to the receipt and issue of digital assets by the Human Protocol Foundation for DCC’s advisory services rendered in FY2019.  

Q3FY21 Result Highlights:

• Increase in Revenue & FUM: DCC posted revenue growth of 232% QoQ to $713,000 in Q3FY21 due to the increase in management and performance fees. The FUM size expanded to $31.9 million in Q3FY21, up by 237% on QoQ.
• Increased Liquid Assets: The liquid assets increased to $25.5 million in Q3FY21, up by 122% QoQ due to the capital raise in the quarter and robust performance of the digital asset funds and Bitcoin.
• Higher Cash Receipts: DCC reported an increase in cash receipts to $267K in Q3FY21, up by 77% QoQ because of the higher fees from the funds under management (FUM) segment.
• Investment in BAM: During the quarter, DCC invested $58,000 in the development of its Drawbridge application and invested further US$250,000 in the Singapore-based Bullion Asset Management Services Pte Limited (BAM).
• Capital Raise: During the March 2021 quarter, DCC raised $8.8 million via the issue of 97.96 million shares at $0.09 per share.
• Cash & Investments Balance: As of 31 March 2021, DCC held listed digital assets, cash, and unquoted liquid investments worth over $46.4 million.

Total Revenue & Net Income Trend from FY16-FY20; (Analysis by Kalkine Group)

Key Risks: The company is exposed to various financial risks such as credit risk and digital asset price risk, and others. DCC also faces the evolving regulatory landscape due to operating in the niche space of cryptocurrency.

Outlook: The management believes that DCC is well placed and funded to deliver business growth in 2021. The company is witnessing an increasing focus for better corporate governance primarily through investor driven ESG priorities. DCC aims to address these issues through its Drawbridge technology. Besides, the digital asset funds management business is gaining traction due to the investment interest in the sector. DCC is focused on delivering returns on its treasury position (Bitcoin and cash), while maintaining robust security and governance controls.

Stock Recommendation: The stock of DCC gave a positive return of 33.33% in the past nine months and a positive return of 136.36% in the past year. The stock is currently trading lower than the 52-weeks’ average price level band of $0.022-$0.135. On a TTM basis, the stock of DCC is trading at a price to book value multiple of 1.8x, lower than the industry (Technology) median of 4.5x, thus seems undervalued. Considering the current trading levels, increase in quarterly revenue, cash receipts, and liquid assets in Q3FY21, development of Drawbridge platform, and engagement with customers for the application of Drawbridge, traction for digital asset funds management business, and valuation on a TTM basis, and associated regulatory, technological, and financial risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.052, down by 3.704% as on 15 July 2021.

DCC 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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