09
Sep
2020

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How much upside is left for NXT?

When we started the Montgomery Small Companies Fund 12 months ago, data centre operator NEXTDC (ASX:NXT) was one of the first businesses we bought.  On our analysis, the shares were cheap.  One year on and the share price has almost doubled.  NXT continues to be a great business but, at current prices, is it still a good investment?

Recap: what’s happened – “problems” resolved

At $6.50 back in October 2019 the market was fixated on two things; NXT’s earnings growth had hit an ‘air pocket’ driven by delivery problems with S2 (its huge Sydney data centre development) and the company’s ability to fund the growth pipeline.  On our assessment it was those issues that were causing the shares to trade at just half of the $13 long term valuation we had for NXT back then.

Problem 1 – Tick: Earnings “air pocket” gone and certainty clarified. NXT management delivered S2, and that development is now sold out. Investors now view the company’s next data centre development in Sydney, S3, as an asset that can’t come quickly enough rather than wondering if it would get built at all. The earnings “air pocket” is now long forgotten, as it should be. Next year’s earnings is a pretty useless yardstick with which to assess value in a growth business developing and operating 30+ year assets.

Problem 2 – Tick: Capital raised and growth funding assured. NXT’s growth is capital intensive, however the company has a proven track record of developing multiple datacentres (9 and counting) having to date organically deployed $1.5 billion, building from scratch arguably the highest quality connectivity-neutral datacentres in Australia. Management have built these (mostly) on time and on budget and have demonstrated consistent returns on capital in the range of 15-20 per cent EBITDA/Capital, unlevered.

These returns are great, and these are 30+ year assets. Put your hand up if you want some of that!

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