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Date : 22/09/2020

Nextdc Limited

ASX :

NXT

Market Cap : $5.374 Billion

Buy

52 Week Range : $5.91 - $12.48

Share Price : $12.05

A high-growth business that will grow stronger due to the impacts of the pandemic. We give it a "Buy" recommendation

Company Analysis

Nextdc Limited (ASX: NXT) is an ASX 100 listed company that operates in the information technology sector by offering digital infrastructure solutions to businesses. The firm primarily offers 4 solutions:

  • Data Centre Solutions – Provides secure and high-density data centre space with zero outages through its facilities.
  • Connectivity Solutions – Physical & Virtual connections to clouds, carriers, and suppliers to anyone within NXT’s network.
  • Business Continuity – Provides continuous business critical solutions to ensure operations continue during times of crisis.
  • Disaster Recovery – Disaster recovery strategy solutions for when businesses suffer from unplanned outages – to preserve & protect data.

In today’s shift to a digital economy, the demand for cloud centres has skyrocketed as more and more businesses are going online. The transformation has been only accelerated by the pandemic, and hence, data centre businesses are booming all around the world.

As per the latest annual report, that is, June 30th, 2020, NXT operates 9 data centres, 13,051 interconnections, 12 cloud on-ramps, 6 public clouds, and serves 1,364 customers in Australia.
In a nutshell, NXT’s services enable businesses and individuals to host their websites on the web and deliver it to their customers – the most important part in a digital business.

The firm already has a massive list of awards that it has won and is a leader in the Australian Data Centre Services industry. Nextdc is Amazon’s AWS wing’s service delivery partner for AWS direct customers in Australia. NXT now has over 640 partners.

Company Updates


Source: Tradingview.com

NXT recovered from the downturn in March almost immediately as the importance and demands of a digital economy became clear to investors. NXT operates in a critical space where the company will grow stronger if the pandemic persists and restrictions are applied. Since the recovery, the stock has rallied to set a 52-week high in July and is now trading 3% off the highs set in August.

As more and more businesses are going online in Australia, NXT has been adding to its customers. The pandemic has definitely benefited the business model of NXT.

The firm most recently announced a very positive financial report for FY2020. Recent announcements show data centre facilities are seeing a lot more traffic recently.

In April 2020, the firm completed an institutional placement offering to raise $672m of equity capital – aimed at investments to drive growth with market demands going through the roof.

Industry Analysis

Data Centres are like Digital Real Estate. It is the most essential requirement to operate a business over the internet. For technology firms, data centre costs are one of the biggest operating costs. Since in-house data centres are too expensive, businesses outsource to providers of these digital infrastructures to host on their servers.

The coronavirus has only increased the shift to a digital economy as more and more businesses are moving to online to continue operations by abiding by restrictions that have been imposed. The shift to online also drastically reduces operating expenses.

New trends such as work-from-home, remote learning and teaching, online shopping, etc only fortify businesses that are in the data centre business.

The IT infrastructure industry has shifted to a “as-a-service” industry – business models that are based on consumption. This massively reduces costs for users and hence, the adoption rates are high. With Covid19 affecting firms that are capital intensive, the shift towards cloud will be accelerated as more businesses will strategically move towards cloud to reduce risk and free up capital.

The IT infrastructure industry is a high growth industry which has been growing at 14% compounded annual growth rate. It is forecasted to grow at the same pace for the next few years as we move towards a much more digitised economy.

Investment Thesis

Digital Infrastructure is a business with high profit margins. However, young firms such as NXT have to invest heavily for growth to be able to reap the benefits later. The consumption based “as-a-service” model ensures stable revenues coming in over a sustained period of time. Metrics that ensure health in operations are customer growth rates, usage growth and retention rates.

NXT has had positive performances in each of the above metrics. The firm has had a consistent growth rate when it comes to acquiring new customers.

NXT’s installed capacity of total power is currently 78.8MW from all 9 of its operating facilities. The customer utilisation of this installed capacity also shows a very steady growth rate just as the number of customers are rising.

In the past 4 years, an average of 88% of the installed capacity has been utilised by NXT’s customers. This indicates that NXT is able to retain most of its customers since there has not been any spikes in the average utilisation and the growth rates of both the customers and utilisation are identical.

These metrics show just how strong NXT’s performances are as it is in a growth stage in the company life cycle. FY2020 results showed revenues of $200m – an 18% increase from FY2019. Operating costs increased by $20m as the firm has to upgrade its facilities to service new customers. The EBITDA margins for NXT have been growing steadily, which can be seen from the below chart as revenues increase with only a marginal increase in costs – a sign that complements a business in its growth stage.

NXT has $892m in Cash and $2.6b in assets, that includes its operational facilities. The long-term debt stands at 496m, and total liabilities come in at $976m. Hence, assets exceed liabilities by 2.7x – a sign of strength in its balance sheet. The capital structure of the firm is another sign of good financial health as 65.4% comes from equity and 34.2% from debt.

The firm has very low credit risk since it has enough cash to cover its long-term debts as well. The short-term focus for NXT is to focus on ensuring the continuity of all its businesses – which is essentially its ultimate focus in the IT infrastructure industry.

The larger risks the firm is exposed to are cyber-risks, breach of security, and customer management. Cyber risks have increased year-on-year in the digital world. Nextdc has been using state of the art security systems to mitigate these risks. Customer management is the ability to effectively manage the growth rates in customers. Having too many too early will bring signs of lower customer satisfaction- leading to decreased retention. However, NXT has mitigated these risks with excellent management and a sound business model.

Recommendation

Nextdc Limited is operating in a high-growth sector with a sound business model and management team. The firm has delivered good performances and is capturing the Australian IT Infrastructure market. The financial health of the firm is sound, and the business will not be disrupted by Covid19 like other sectors. As a matter of fact, the business has grown stronger as Covid19 has accelerated the shift to a digital economy. The firm is positioned well to drive growth. We issue a “Buy” recommendation for Nextdc and we expect it to come out stronger if there is a second wave of the pandemic in the months to come.

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