We have previously recommended NextDC (ASX:NXT) successfully after the Company completed equity raisings. Since our most recent report on the Company in The Dynamic Investor, the shares are up by over 10%. With this in mind, we assess whether the re-rating in NXT shares still has further runway.
About NextDC
NextDC is Australia’s largest independent Data Centre operator. The Company, which offers a single national data centre and connectivity solution in Australia, provides co-location for Cloud Service Providers, Enterprises and Channel Partners. Data centres are classified as either: Hyperscale: 100MW – 300MW, Major Metro: 10MW – 100MW, Region: 1MW – 10MW, Edge: 100KW – 1MW.
NextDC currently has 12 live data centres in major capital cities (Brisbane, Melbourne, Perth and Sydney) and is in the process of building a further two (Sydney (S3) & Melbourne (M3)). The Company also has an addition hyperscale site (S4) and new regional/edge sites.
NXT derives revenue from numerous product sources including white space (including power recharge), rack-ready services, establishment service fees and add-on services.
Key Fundamental Drivers
Equity Raisings Support Growth Plans
In the past 12 month, NXT has undertaken two equity raisings in order to fast track its growth plans. On 11 April 2024, NXT announced a $1.32b equity raising at $15.40 per share. This was at a discount to the closing price of $16.52 per share prior to the shares entering into a trading halt. The Company last raised equity in May 2023 at $10.80 per share, raising $618m.
Proceeds from the offer ($1.3b) along with existing liquidity will be used to fund the accelerated development and fit-out in core Sydney and Melbourne markets. In addition, the proceeds support “unprecedented customer demand” for high-quality and secure data centre services.
The size of the current equity raising – more than double that of last year’s $618m – demonstrates how the scale of the opportunity has evolved over a relatively short period of time. The prospect of significantly large hyperscale deals – where the increased capacity would require the bring-forward of capacity – has necessitated the need for the latest equity raising.
There are three key drivers for continuing growth in demand:
i. Companies are moving workloads from on-premise installations to colocation facilities.
ii. Transition to cloud; a trend which NXT says has sustained its growth over the last decade and will continue to do so. Public cloud services revenue is forecast to grow at 19% per annum to 2027.
iii. Artificial Intelligence (AI) – The Company characterises the AI opportunity for NXT as 3-5x bigger than the Total Addressable Markets in its existing markets.
Strong Contracted Capacity Profile
NXT ended FY23 with 122.2MW contracted capacity and has provided guidance for an additional ~40-45MW of contract wins in FY24. As at 1H24, contracted capacity was 149MW, so this guidance appears to be on target. The additional contracted capacity in 2H24 (~15MW) is driven by hyperscale customers.
Importantly, contracted utilisation from hyperscale customers provides visibility into the growth path for revenue/EBITDA. Further, contracted MW’s have historically been a key driver of share price and NXT’s debt covenant is based on contracted EBITDA. Both FY25 and FY26 are expected to be better contract win years than FY24.
High Gearing Levels Not a Concern
Gearing (on a net debt to EBITDA basis) as at 31 December 2023 was 3.9x. Following the latest equity raising, the balance sheet will return temporarily to a net cash position. However, the balance sheet is likely to be in a modest net debt position by the end of FY24. This is because the Company funds the majority of its CAPEX requirements from $1.5m in undrawn debt facilities.
It is worth noting that given their long customer tenure, data centres can handle higher debt levels than traditional industrial companies. With data centres assets able to be highly geared, the sizeable equity raising just announced should position NXT well to engage with its debt syndicate on upsizing its debt facilities. To this end, the Company upsized its senior debt facilities in January 2023.
We expect further equity raisings over the next 12 months to both alleviate the elevated gearing level and to fund continued demand.
Fundamental View
While equity raisings have a dilutionary impact on EPS, they are typically a precursor to significantly large hyperscale deals. Accordingly, the share price performance since completion of the equity raising has reflected this. While the share price now appears stretched, it is trading at the lower end of market valuations. This indicates that there may be further upside in the shares.
Charting View
Our previous charting comment in The Dynamic Investor was on 20 February where we noted the break above the major resistance line near $14 was a buying opportunity and that it should lead to a multi-month move. The shares eased back in April after a strong run but they have found some good buying support again on healthy volumes. NXT is back to trending higher and we expect it to continue on from here to higher levels.
Michael Gable is managing director of Fairmont Equities.
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