2020 a year in review_bourse | Page 8

COMPANY NEWS & UPDATES

NEXTDC Limited ( NXT )

Hold Valuation $ 10.85

Earnings Forecast

* Profit & EPS adjusted for options , goodwill , notional earnings and nonrecurring items .

Initiate Coverage

We initiate coverage of NXT with a valuation of $ 10.85 . Our DCF valuation assumes a 9 % cost of equity and a long-term 5.8 % pretax cost of debt , leading to a WACC of 8.4 %.

NXT operates 9 data centres with a focus on colocation and interconnection between enterprise and government customers , global cloud and ICT providers and telecommunication networks . NXT rents out rack space and provides cooling , power and security services and offers optional technical and project management support . The company ' s tenants house their servers within the data centre and can connect to each other via physical and virtual connections . Colocation services allow enterprises to enhance security of data transmission and reduce latency . As of FY20 , NXT had over 1,300 customers , 70 networks , six cloud providers , and 12 cloud on-ramps which provide direct connection to cloud providers .

The key determinant of whether a data centre provider can establish a long-term competitive advantage is network density . Network providers are vital as they allow data stored within the data centre to be transmitted to the outside world . A network dense ecosystem is highly valuable as it attracts cloud providers to establish cloud on ramps , which then attract enterprises requiring connection between their private cloud and public cloud providers . This dynamic creates a powerful network effect which is difficult and costly for new entrants to replicate .

NXT is well placed to benefit from industry megatrends including the growing adoption of cloud computing , the Internet of things and artificial intelligence leading to exponential growth in data creation . We forecast data centre services revenue to grow at a CAGR of 30 % over our 10-year forecast period underpinned by double digit growth in billing customer utilisation . Our forecasts assume Australian data storage demand increases at a CAGR of 33 % and total power built grows at a CAGR of 28 % to FY30 . We factor in power efficiency improving over our forecast period . We assume NXT ' s market share remains stable over our forecast period . As capacity utilisation improves , we expect billing utilisation to normalise at approximately 80 % of total built capacity by 2030 . We expect revenue per megawatt to decline each year by 1.5 % as technological advancements and improved energy efficiency reduce costs of data storage .

We expect operating margins to improve to 28 % by FY30 from 17 % in FY20 as capacity utilisation improves and there is a favourable mix shift towards higher margin interconnection revenue and expanding capacity in higher-margin locations . We forecast NXT to return a profit in FY21 and for net income to grow at a CAGR of 58 % thereafter to 2030 . Our earnings growth forecasts rely on material capacity expansion which will require material capital expenditure over the 10 years to FY30 . We forecast total built power capacity to exceed 900 megawatts by FY30 , from approximately 80 megawatts in FY20 .

We forecast EBITDA to grow 25 % in FY21 to $ 130 million , which is at the top end of company guidance . Our earnings forecasts are underpinned by forecast revenue growth of 24 % and stable operating margins . We expect operating margin growth to be modest in the near term as capacity utilisation deteriorates due to rapid capacity expansion . We believe the COVID-19 pandemic has strengthened tailwinds for the data storage market and NXT as many businesses have accelerated their digital transformation by rapidly adopting cloud-based solutions and expanding redundancy and back up network solutions amid increased reliance on technology . Social distancing restrictions have led to increased adoption of remote working , online shopping and social media technologies resulting in increased data generation .

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