##{"id":60237,"date":"2012-07-11T11:48:08","date_gmt":"2012-07-11T01:48:08","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/07\/11\/data-centres-the-nextdc-big-thing\/"},"modified":"2012-07-11T11:48:08","modified_gmt":"2012-07-11T01:48:08","slug":"data-centres-the-nextdc-big-thing","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/07\/11\/data-centres-the-nextdc-big-thing\/","title":{"rendered":"Data Centres The NEXTDC Big Thing"},"content":{"rendered":"

\n\t – NEXTDC<\/span> a data centre<\/span> provider
\n\t – Citi<\/span> initiates coverage with a Buy rating
\n\t – Strong operating leverage an attraction
\n\t – Data market offers strong growth potential <\/strong><\/p>\n

\n\t
\n\tBy Chris Shaw<\/p>\n

\n\tData centre<\/span> provider NEXTDC<\/span> ((NXT<\/span>)) offers space, power, cooling and security options to allow customers to both store data and operate their computing, network and IT infrastructure requirements. The company has no ties to any particular carrier.<\/p>\n

\n\tCiti<\/span> has initiated coverage on NEXTDC<\/span> with a Buy rating, joining RBS<\/span> Australia as the only brokers in the FNArena<\/span> database to cover the small-cap stock. RBS<\/span> also rates NEXTDC<\/span> as a Buy.<\/p>\n

\n\tOne attraction for Citi<\/span> is NEXTC<\/span> offers considerable operating leverage, as once the site of a data centre<\/span> has been acquired and construction is complete, operating costs are relatively modest. This means high data centre<\/span> utilisation<\/span> is highly profitable, Citi<\/span> noting EBIT (earnings before interest and tax) margins of around 35% are the goal of management. <\/p>\n

\n\tAs well, Citi<\/span> notes a number of the group's centres<\/span> are scalable both within the initial floor plate releases and further expansion opportunities, which adds to growth potential as the national expansion strategy continues to be rolled out. NEXTDC<\/span> currently has one operating asset but has plans for five centres<\/span> in coming years.<\/p>\n

\n\tAccess to capital is a genuine barrier to entry in the data centre<\/span> sector in Citi's<\/span> view, especially given the scale of NEXTDC's<\/span> business model. The company is near the mid-point of a medium-term capex<\/span> cycle and Citi<\/span> suggests funding, including sale and leasebacks<\/span>, appears solid at present.<\/p>\n

\n\tLooking forward, Citi<\/span> expects the data centre<\/span> model offers strong long-term growth given the continued strong growth in data usage. This reflects both the increased usage of smart phones and tablets as well the emergence of cloud computing and a shift from in-sourcing to outsourcing by a number of companies. <\/p>\n

\n\tThis supports Citi's<\/span> expectations of strong earnings growth in coming years. The broker's earnings per share (EPS) forecasts stand at minus 5.5c this year, rising to 0.8c in FY13<\/span> and 3.8c in FY14<\/span> and are based on conservative sales assumptions at each data centre<\/span> location. Citi's<\/span> numbers assume NEXTDC<\/span> reaches 58% of total capacity utilisation<\/span> by FY16<\/span>, which is around the time the company should enjoy strong earnings growth in the broker's view.<\/p>\n

\n\tBy way of comparison, RBS<\/span> Australia has EPS forecasts for NEXTDC<\/span> of minus 6.7c this year and 0.4c in FY13<\/span>. One key to a potential re-rating given the time until significant earnings growth occurs is increased visibility. Citi<\/span> expects the potential of NEXTDC's<\/span> model will become clearer over the next 12 months, with some factors to watch for including available power load and utilisation<\/span> numbers and signs clients are using multiple sites run by NEXTDC<\/span>.<\/p>\n

\n\tThere are risks associated with NEXTDC's<\/span> expansion plans, including delays in completing data centre<\/span> projects given the potential for clients to sign elsewhere as a result and margin pressures if supply of data centre<\/span> space outstrips demand. The fact NEXTDC<\/span> only has one operating asset at present amplifies these risks according to Citi<\/span> and sees the broker attach a High Risk assessment to its Buy rating.<\/p>\n

\n\tOn a discounted cash flow basis Citi<\/span> values NEXTDC<\/span> at $2.41 and sets its target at this level. This is in-line with the RBS<\/span> target of $2.38 and implies upside of close to 30% relative to the current share price.<\/p>\n

\n\tGiven the magnitude of its expansion plans NEXTDC<\/span> is not expected to pay dividends in the next few years, limiting returns to capital appreciation.<\/p>\n

\n\tShares in NEXTDC<\/span> today are down slightly in a weaker overall market and as at 11.15am the stock was 2c<\/span> lower at $1.87. This compares to a range over the past year of $1.345 to $2.36.<\/p>\n

\n\t
\n\tFind out why FNArena<\/span> subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"