US trade war rattles markets

Global trade war rattles markets


Business
The looming US trade war with China has rocked the global stock market.

The looming US trade war with China has rocked the global stock market.

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The looming US trade war with China has rocked the global stock market.

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The prospect of an escalated global trade war is still rattling global equity markets.

Towards the end of the week a level of calm descended as speculation mounted that the Trump Administrations hard line rhetoric is all part of their negotiating process.

The response from China so far has been swift, with authorities announcing 25 per cent tariffs on a range of US imports.

The prospect of an escalated global trade war is still rattling global equity markets...speculation mounted that the Trump Administrations hard line rhetoric is all part of their negotiating process...The response from China so far has been swift.

Santos received a new bid form Harbour Energy which was 43 per cent higher than their initial approach.   

The Board have allowed Harbour Energy to conduct due diligence after they offered an indicative bid of US $4.98 per share on a non-binding, conditional basis.

Whilst this bid was offered at a 10 per cent premium to the stock’s closing price it is now trading below the offer price in the market.

I would suggest that this is largely due to concerns about Foreign Invest Review approval, the due diligence process and the requirement for Harbour Energy to raise sufficient debt funding.

Whilst the tech sector in the US has taken a beating recently it is interesting to review some of the stocks listed on our market.

Next DC (NXT) is an interesting example, the company is a data centre developer with high quality assets in demand.

The company does trade on a higher multiple to an infrastructure stock, and is a higher risk exposure.

However we believe the company is likely to reward investors over the longer term driven by the secular growth trend in data usage and rising free cashflow.

As utilization continues to improve with new customers announced we expect the stock to re-rate due to a reduced risk profile.

Higher cashflow and increasing growth drivers (pricing power and stronger growth in high margin cross connections).

NXT is Australia’s leading provider of data centre capacity and services to leading corporates, IT and government.

NXT currently operates five data centres in Melbourne, Sydney, Perth, Canberra and Brisbane (42MW in total capacity).

NXT is also in the process of building additional capacity through three new data centres in Sydney (S2 -  30MW in 1H19), Melbourne (M2  -  40MW in 1H18)  and Brisbane (B2 - 6MW 2H17).

NXT has a first mover advantage with high barriers to entry given new entrants would require scale and large capital requirements to replicate.

This also makes NXT a potential takeover target for large overseas operators.

We note Equinix, the strongest co-location player globally recently took over local operator Metronode in Dec-17.

This transaction was done at a “full” multiple of EV/EBITDA of 20.8x versus recent global data centre M and A averaging EV/EBITDA 15.5x.

I believe this highlights the infancy of growth in this space and the demand for assets.

  • This article does not take into account the investment objectives, financial situation or particular needs of any particular person.  Accordingly, before acting on any advice contained in this article, you should assess whether it is appropriate in light of your own financial circumstances or contact your financial adviser. Christopher Hindmarsh is an adviser at JBWere Limited. JBWere Limited is owned by National Australia Bank Limited.
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