Summary
The Retail Offer is aiming to raise approximately $200m with the proceeds being used to fund the development of new data centres. The Retail Entitlement Offer price of $10.80 per share is the same as the Institutional Offer price and ratio (1 for 8). The Retail Entitlement Offer represents a good opportunity for existing investors to participate in the capital raising acquiring shares at a discount to the current market price at the same price as the institutional offering and to avoid the dilutionary impact of the offer. Consider participating in the Entitlement Offer provided this is in line with individual investor objectives.
Investment Thesis
NextDC is expanding its regional offer to Malaysia and New Zealand with new capacity in Kuala Lumpur and Auckland. The capital raising will also expedite the fit out of the Sydney S3 data centre.
The proceeds will fund:
KL1 - $250m for a 65MW DC, completion 1H26
AK1 – $140m for a 10MW DC on land already purchased in 1H23 ($21m), completion 1H26.
S3 – A $150m accelerated fitout of S3 to accommodate contracted utilisation increase from 35.9MW to 120MW.
The balance of funds will be used for general corporate purposes and transaction costs.
Pro forma gearing will be 10.7% (net debt/net debt plus equity) and leverage of 1.5x (net debt to EBITDA). Both metrics are materially lower than as at 31 December 2022 of 33.9% and 4.8x respectively.
The Directors and CEO of NXT have committed to taking up their respective entitlements.
NXT provided updated guidance for FY23 indicating data services revenue in the range of $350-360m and underlying EBITDA of $192-196m (previously $190-198m). Capex is being guided to $670-720m, previously $620-670m) with the difference mainly attributable to the purchase of land for KL1 ($53m).
NXT has a long history of measured capital raisings to fund the expansion of its data centres dating back to 2012 with M1 in Melbourne which at 12MW was thought to be too large!
The last capital raising in April 2020 was priced at $7.80 and raised $863m equity ($672m institutional placement, $191m share purchase plan) to fund an expansion in Sydney. The Institutional deal was covered the night before it was announced.
The expansion into two new countries is a significant move for NXT but builds on its substantial expertise and proven record in Australia. NXT has experienced a surge in contracted utilisation since 31 December equating to 35.9MW or 43% to 120MW.
Contracted utilisation and EBITDA have grown at a compound annual rate of 21% and 28% respectively over the last five years.
The long-term structural story of increasing data requirements remains attractive, but the expansion into Asia adds some risk. NXT is trading on an EV/EBITDA multiple above 36x which fully values the stock, in our view. We retain our Hold recommendation.
Key Risks
The demand for DC services might reduce or competition could erode profitability. Data Centres are reliant on secure, uninterrupted power, so if this was disrupted, it could affect operations and customers. The loss of key contracts could also affect earnings. Cybersecurity is a primary risk for NXT so the provision for adequate protection is paramount.
Figure 1: Data centres as at 31 December 2022
Figure 2: Sales metrics
