NEXTDC (NXT), a stock I have discussed recently, announced a capital raising to acquire three commercial properties for future data centre developments.
The capital raising is by way of an underwritten institutional placement of $281 million and an uncapped non-underwritten share purchase plan (SPP).
The institutional placement is split between $131m general placement and $150m to new cornerstone investor UniSuper (paid $6.98).
The general placement underwritten floor price is $6.43 per share representing a three per cent discount to the 5-day VWAP and 5.6 per cent discount to the last close price of $6.81.
The placement price was set at $6.81 as at April 18, 2018 after the institutional book-build.
The new data center developments will be in Sydney (“S3”), Melbourne (“M3”) and Perth (“P2”).
I see this as a positive development and continue to hold a favourable view on the stock and would buy the stock at current levels on a long term view.
As utilisation continues to improve with new customers announced, we expect the stock to re-rate due to a reduced risk profile, higher cash-flow and increasing growth drivers (pricing power and stronger growth in high margin cross connections).
The purchase and development of these new properties is evidence of increase demand for premium data centre services.
Given growth expectations are non-linear this is a strategic raising and sets up the company to be able to capture growth as it arises given the lead time to develop the data centres.
The three new purchases will add to NXT existing seven operational data centres and one data centre under construction taking the total portfolio to 11 centres.
Advantages of increasing the number of centres starts to give NXT flexibility in offering a portfolio solution to clients.
There are development risks, given the new data centres will need to be built there are risks involving planning approvals and consents, escalation of development costs and unforeseen project delays.
Another potential risk is the reduction in demand for data centre services and or slower utilisation across its portfolio.
Although it is still early days, competition is ramping up with known competitor AirTrunk also building capacity.
Given the pace of technology there could be a risk that NXT’s offering is surpassed by superior technology.
For now I see the opportunity out weighing these risks, as previously discussed, NXT has a first mover advantage with high barriers to entry given new entrants would require scale and large capital requirements to replicate.
The three new purchases will add to NXT existing seven operational data centres and one data centre under construction taking the total portfolio to 11 centres. Advantages of increasing the number of centres starts to give NXT flexibility in offering a portfolio solution to clients.
- Christopher Hindmarsh
This also makes NXT a potential takeover target for large overseas operators.
- 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.
