NEXTDC’s capital raising – should you take part?

Co-founder of the Switzer Report
Print This Post A A A

One of my favourite tech companies, NEXTDC, is using a buoyant share price and AI “hype” to tap the market for an opportunistic capital raising. Last Thursday, it announced that it was seeking to raise $1.32 billion to accelerate the development of its data centres. The funds will be raised through an underwritten non-renounceable entitlement offer on a 1 for 6 basis, with new shares issued at $15.40 per share

Let’s take a closer look at NEXTDC and the capital raising and answer the question:” should you take part?”

Accelerating the development of the NEXTDC business

NEXTDC is an operator of top tier data centres, describing itself as “Asia’s most innovative Date Centre-as a-Service provider”. It has data centres in Sydney, Melbourne, Canberra, Brisbane, Perth, and Port Headland, and is currently developing centres in Adelaide, Darwin, Mt Newman, Auckland and Kuala Lumpur, in addition to material expansion in Sydney and Melbourne. Approximately 82% of its revenue comes from the Sydney and Melbourne centres.

Over the last four years, net revenue at NEXTDC has grown at a compound annual growth rate (CAGR) of 17% and underlying EBITDA at 20%. In the first half of FY24, it generated EBITDA of $102m on net revenue of $149.1m.

NEXTDC continues to see significant growth for its data centre services underpinned by structural tailwinds and has decided to bring forward the development and fitout of key assets in Sydney and Melbourne.

It says that growth in global data volume and migration to cloud have driven data centre market growth over the last decade. These demand drivers continue to remain robust and are forecast to grow over the medium term.

Further, artificial intelligence (AI) is shaping up to be the next megatrend for the data centre industry. The unprecedented speed with which AI is being embraced is driving demand, with global data centre demand forecast to grow at a CAGR of 19% over the next 4 years (according to PWC), up from 15% over the last 6 years. AI workloads are power intensive, with average power density 2.5x larger than non-AI workloads

NEXTDC is benefitting from this megatrend, with its forward order book is at record highs and contracted utilisation exceeding built capacity. It needs to develop more capacity in its core markets and sees an opportunity to accelerate the development and fitout of data centres.

With a capital raising of $1.3bn and existing liquidity of $2.1bn (undrawn debt facilities and cash on hand), it will have $3.4bn to accelerate development in its core markets as follows:

  • $400m to accelerate the built capacity of its S3 data centre in Sydney to 50MW;
  • $350m to fast track the development of stage 1 building works for its new S4 data centre in Sydney;
  • $300m to fast track the development of stage 1 building works for its new S5 data centre in Sydney;
  • $330m to accelerate the built capacity of its M2 data centre in Melbourne to 60MW;
  • $500m for identified land acquisition opportunities in Asia-Pacific;
  • Existing capital expenditure in 2H24 of $643m; and
  • $887m for general corporate purposes and costs of the offer ($25m).

On a proforma basis, NEXTDC will be geared at 25.6% with a leverage ratio of 3.9x (net debt to EBITDA).

NEXTDC has reaffirmed full year FY24 guidance of total revenue in the range of $400m to $415m and underlying EBITDA in the range of $190m to $200m.

Capital raising

$1,322m is being raised through a 1 for 6 pro-rated non-renounceable entitlement offer at $15.40 per share. The price represents a 6.8% discount to the theoretical ex-rights price (TERP). The represents a comparison of the offer price to the price of NEXTDC’s shares immediately prior to the announcement of the offer.

The first part of the offer, to institutions, was completed on Friday with 99% of investors taking up their entitlements.

The second part of the offer, to retail investors, is due to open on 18 April and is expected to close on Thursday 2 May. Retail shareholders will effectively have three choices:

  1. To take up some or all of their entitlements by paying $15.40 for each new share. On a 1 for 6 basis, if you have 1,000 shares in NEXTDC, you will have an entitlement to purchase 167 new shares at $15.40 each;
  2. To do nothing, in which case the entitlements lapse; or
  3. To take part in a “top-up” facility. In addition to their entitlements, retail shareholders may apply for additional shares up to 100% of their existing entitlements. These applications may be subject to a scale back.

What do the brokers say?

Ahead of the capital raising, the major brokers were relatively bullish on NEXTDC. According to FN Arena, the consensus target price was $18.77. Most of the brokers had a target price around $20, with Ord Minnett (Morningstar) the exception with a target price of $14. Among Ord Minnett’s concerns was the length of time it takes to plan, build and fit out centres.

NEXTDC (NXT) – last 5 years

What’s the bottom line?

Institutions have strongly supported the offer (despite the narrow discount to the TERP) and the brokers are positive. These leads, together with the company having a full order book and supporting AI/data megatrends, makes this a “buy”. If you have the cash, you should take up your entitlements.

My reservations are that the price has rallied strongly and the entitlement issue will lead to “stock in lose hands”. Recent market capital raisings haven’t proved to be winners for this reason.

So, I am not expecting short term share price appreciation. But, for the long term, investing in NEXTDC makes sense.

 

 

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Also from this edition