Other than death and taxes, the only other certainty is the world needs more data centre capacity. NextDC’s established facilities are performing well, but there is a long and large pipeline of new capacity to be built.
The NXT story is all about the explosion in cloud hyperscale demand and the company’s ability to build and sell capacity. For almost a decade now, NXT has been comfortably filling the capacity it has been building and has been significantly improving the quality of its product and service.
NXT signed 5.5MW of new capacity sales in the 7 months to January 2022, which was similar to 2H21 (4.5MW). There are some capacity constraints in Sydney until the S3 facility (80MW total planned) adds more capacity later this half. There should be a significant step up in sales next year as NXT will plenty of new capacity to sell in Sydney and Melbourne and we anticipate the major hyperscale customers will be ready to buy having used up most of their capacity contracted in FY20.
Total capacity built by NXT is closing in on 100MW but the planned capacity out to 2035 is a further 400MW, excluding a proposed mega facility in Sydney (S4) that could add another 300MW.
We think that from FY24f, NXT needs to be selling 20-30MW per annum in order to fill the planned capacity within a 10-12 year horizon.
Capex guidance has been raised to $530-580 million in FY22f (was $480-540 million) with the increase relating to an additional data hall at M3 (Melbourne, 150MW total planned) on opening in 1H23f and some spend at P2 (Perth).
Net debt is $325 million, and the company has over $2 billion of headroom available on its facilities. That is sufficient to fund the existing plans so that net debt should peak at around $1.4 billion in FY28f. Before then, net debt could increase to almost 5x EBITDA in FY24f, but lenders would have been aware of this profile when NXT refinanced its facilities in November 2021.
Investment view
After reporting underlying EBITDA growth of 29% in 1H22 to $85 million, NXT has upgraded its FY22f guidance to $163-167 million (from $160-165 million).
The long term story is well intact, so the real point of interest comes down to execution on the build and strategy. NXT’s track record so far has been good, but it will need to lift its sales intensity over the next few years to match the capacity build.
Risks to investment view
The demand for Data Centre capacity could be less than expected leading to an excess of capacity given the company’s planned expansions. Competition could lure customers away to other facilities which would also impact earnings.
Recommendation
We have retained our Hold recommendation.
