Company Overview: NEXTDC Limited is a technology company, which is engaged in the development and operation of independent data centers in Australia. The Company is engaged in enabling business transformation through data center outsourcing solutions, connectivity services and infrastructure management software. Its segments include Qld, Vic, NSW, WA, ACT and Other. The Company's services categories include data center solutions, connectivity, professional services and cloud connections. The Company offers solutions, including Custom Colocation, AXONVX and ONEDC. AXONVX enables customers to activate high-speed private connections to various carries and cloud platforms on-demand, and access simplified inter-capital connectivity services. ONEDC is the Company's data center infrastructure management platform. ONEDC is engaged in managing customers entire data center infrastructure and combining their internal and colocated environments all managed through a single console.
 

NXT Details

Unique Revenue Generation Model: NEXTDC Limited (ASX: NXT) is an ASX200-listed technology company with the market capitalization of circa $2.18 Bn as of 26 April 2019. The company has a unique business model which offers significant competitive strengths and facilitates the delivery of sustainable growth over the long term. In 1HFY19, it generated around 92.7% of revenue from Data Centre Services, and rest came from interest income and distribution from investment. Data Centre Services comprise of diversified services which include Colocation, Data Centre Infrastructure Management (DCIM), Connectivity Services, Project Management, and Technical Support. Currently, it has eight data centres across Australia wherein five 1st generation data centres operate in Brisbane (B1), Melbourne (M1), Sydney (S1), Canberra (C1) and Perth (P1), and three 2nd generation data centres operate in Brisbane (B2), Melbourne (M2), and Sydney (S2). Moreover, its plans are in progress for three additional data centres in Sydney (S3), Melbourne (M3) and Perth (P2). The targeted sectors of the company are the Banking, Financial Services and Insurance (BFSI), Government Institutions, telecom/IT, Internet Media, education, and others. It is a leader in the independent data centre space in Australia. It has a nationwide network of Tier III and Tier IV facilities including enterprise-class collocation services which serves the local and international organizations. The company provides the Data sovereignty which helps to keep the customer’s data onshore - collocating with the company which means the private data of the customers remains under Australian jurisdiction. Moreover, its one national contract helps the customers to take space in any of the data centers of the company and benefit from consistent pricing and Service level agreements (SLAs). Further, with the fully vendor neutral system, the customers can enjoy outstanding services when they host the mission-critical infrastructure in NEXTDC’s facilities. The group has recorded growth for number of customers and interconnections at CAGR of 27 percent and 42 percent, respectively during 1HFY15- 19 and expects a decent rise on the back of increasing demand of outsourcing of data centers in future. From the financial front, the company posted consolidated revenue growth of 40.0 per cent over 1HFY15-19 while EBITDA recorded a CAGR growth of 101.0 per cent over the same period. Hence, we trust management’s ability to address growth opportunities backed by its customer centric business model and its strategic approach towards synergistic acquisitions.
 

Key Metrics (Source: Company Reports and Thomson Reuters), *LTM – Last Twelve Months

Setting an Industry paradigm: The technology company provides a way to transform businesses through better engagement based on demand driven, flexible and scalable connections. The businesses can be de-risked with support based on critical infrastructure; and under an industry umbrella, IT strategies can be revolutionized for various businesses and this gives a competitive edge in view of advantages set through data centre solutions and connectivity landscape. Further, NXT enables businesses to navigate through its  ecosystem to identify a partner of choice for managing data centre, communications and cloud connectivity services. The ecosystem is built with 500+ partners that offer a full range of Telco and IT services. In view of the above and the suite of services that NXT offers, the group has been able to manage the performance in a consistent way when it comes to financial ratios and comparison with peers. The recent opportunity to be selected by the Queensland Government for data centre as a service (DCaaS) enlightens the capability of the group to meet customer demand in view of trends emerging for energy efficient industry standards.
 
Strong Revenue and EBITDA Growth in 1HFY19: NEXTDC continues to derive revenue from numerous product sources including white space (including power recharge), rack ready services, establishment service fees and add-on services. During 1H19, interconnection grew by 34% to 9,982 over the prior corresponding period, representing 7.7% of the total recurring revenue. The highlights include strong revenue growth along with strong operating leverage, and network expansion across the business. The revenue of the company was up by 17% to $90.8 million in 1HFY19 as compared to $77.5 million in 1H18, driven by higher contracted utilizations and increase in interconnections. The underlying EBITDA stood at $42.2 million in 1HFY19 up by 26% as compared to $33.6 million in 1H18, with a 4.6% increase in the EBITDA margin on the prior corresponding period. The statutory net loss after tax for the company stood at $3.1 million as compared to 1H18 net profit of $8.4 million, primarily impacted by a significant rise in finance costs. As of now, the group focuses on its sales strategy in terms of partnering with the providers of infrastructure, platform and packaged services which will help to improve its topline growth in years to come. 
 

1HFY19 Financial Highlights (Source: Company Reports)
 
Expanding Partner Base at a Global level: The company has a partner portfolio which includes the largest independent network of carriers, cloud and IT service providers of the country. It helps its customers to source and connect with cloud platforms, service providers and vendors to build integrated hybrid cloud deployments and scale their IT infrastructure and services. NXTDC brings the cloud to its customers all under the one roof, as a hub for few of the largest public cloud platforms such as Microsoft Azure, Google etc. along with the private cloud providers of the country. The company has plans to scale up its business through increasing partnerships and launch of new products. Following this, the company has built more than 500 partners across 60+ networks. Moreover, the group continues to enhance its go-to-market strategy via its channel partnerships with major telecommunications and IT providers to increase selling capacity without increasing sales operating cost base.
 

Marquee Partners (Source: Company Reports)
 
Contracted Utilisation: During 1H19, NEXTDC increased its contracted utilization by 10.1MW from 40.2MW at 30 June 2018 to 50.4MW at 31 December 2018. As a percentage of installed capacity in NEXTDC's national portfolio, this represents approximately 90% of installed capacity being contracted. The company has added over 9.4MW of new capacity since 30 June 2018. The customers are up by 215 or 25% to 1,090 in 1HFY19 as compared to 875 in the prior corresponding period. During 1HFY19, the company secured a record increase in contractual commitments at S2 and subsequently chose to advance the development of an additional 8MW of capacity, which is under construction. Further, the significant operational leverage is expected to be achieved through enhanced utilisation of existing resources and infrastructure as the Company expands beyond its Initial Facilities. 
 

Installed capacity vs contracted utilization (Source: Company Reports)
 
Well Capitalized for Growth: The expansion activities were largely done through mix of internal accrual and debt funding in the recent past. The present net debt/equity stands at 0.75x in 1HFY19. As at 31 December 2018, the group had an undrawn $300 Mn Syndicates Senior Debt facility. The company plans to use the majority of the new debt funds towards future growth capital expenditure for its existing facilities and for developments that the company is planning. The liquidity for the company (including cash and undrawn senior debt facilities) remained at $644 million at 31 December 2018. The balance sheet position of the company is underpinned by over $1.6 bn of total assets. NEXTDC had a total of $581 million in total property holdings at 31 December 2018. The current ratio of the company stood at 8.96x, increased by 1.4% over the prior corresponding period. Hence, we presume that the company is well capitalised to pursue business objectives.
 
 

Balance Sheet (Source: Company Reports)
 
Acquisition of Data Centers- Support Topline Growth: In November 2018, the company completed the takeover of the Asia Pacific Data Centre Group including the underlying data centre properties P1, M1 and S1. The underlying valuation for the same stood at $261 million. The company also acquired the underlying B1 data centre property for a total cost of $24 million. The acquisitions are in line with the long-term strategy of the company to own the underlying properties for its data centre operations, which resulted in approximately $15 million of annualized rent savings and have strengthened the balance sheet through the addition of further tangible assets. Moreover, it continued its network expansion during the reported period, with the S2 opened to early customer access in 1H19 along with its ongoing development. P2 microsite and connectivity hub of the company opened in 1H19 to facilitate early customer access to the Indigo subsea cable system and other network providers. We expect that these strategic acquisitions will support the topline growth of the company in the forthcoming period with further opportunities in the market. 

Appointment By QLD government: The company recently announced that its Brisbane-based operations have been appointed by Queensland Government as new Enterprise provider on ICT supplier panel so that data centre-as-a-Service (or DCaaS) solutions can be delivered to Queensland Government Departments and Agencies. As a result of the appointment, Queensland Government Departments and Agencies would be able to operate from the secure and highly reliable environment which provides the flexibility to consume its data centre solutions as-a-Service, from our B1 CBD or B2 Fortitude Valley locations.

What to expect from the Company: The property acquisitions will result in lower interest and distribution income in the second half of 2019. Based on the performance of the first half of 2019, the company expects its revenue to be in the range of $180 million to $184 million, the underlying EBITDA to be in the range of $83 million to $87 million and the capital expenditure to be between $430 million and $470 million. The guidance includes strong revenue growth, substantial operating leverage, customer-driven investments, and benchmark operational excellence. As announced on 12 November 2018, NEXTDC received orders for more than 14MW of capacity at its S2 data centre site (47% of total planned capacity). Revenue recognition from these orders will commence in 2H19, with the full run rate impact expected to be recognised in FY22 and beyond.


Financial Ratios (Source: Company Reports and Thomson Reuters)
 
Stock Recommendation: NXT stock is trading at a price of $6.44, with support at $5.8 level and resistance at $7.02. The company is currently trading near its 52-week low level, but taking a closer look at its business approach reveals that the company has a great potential to move upwards. Further, the demand for data centre services is likely to be driven by the continued growth in the volumes of data requiring data centre solutions underpinned by growth in internet traffic, cloud computing, increase outsourcing of data centres. Besides this, the company is expected to drive higher margins and customer retention going forward, along with expected lower interest and distribution income in the second half of 2019 driven by the property acquisitions. From the analysis standpoint, the stock is currently trading at lower P/BV multiples of 2.5x as compared to the industry median of 3.1x, which keeps the stock in the attractive zone. Based on the foregoing, we give a “Buy” recommendation on the stock at the current market price of $6.44 (up 1.577% on 26 April 2019).

 
NXT Daily Chart (Source: Thomson Reuters)

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