How big MAQ’s whopper deal could supersize the business
Macquarie Telecom (ASX:MAQ) is a leading Australian telecom and datacentre provider. Its datacentre business is booming as more and more organisations shift their computing architecture to the Cloud. Now, a major new expansion project promises to propel the business to even greater heights.
As Cloud grows so does demand for datacentre capacity, especially sites well located and proximate to large population and business centres. To capture this high value growth opportunity, MAQ is investing in its datacentre assets, specifically the expansion of its Sydney campus in the datacentre hotspot of Macquarie Park from 10MW to 43MW.
This investment is transformational in its scale, and in our view, also transformational on the profitability of MAQ’s business. MAQ just announced that it’s sold 10MW of this expanded capacity to a new “large wholesale” customer. That’s a “whopper” of a deal. Or maybe a Big MAQ.
IC3E – A transformational development and now contracted
MAQ’s Sydney DC expansion is split over two development projects – IC3E and IC3W (they really shouldn’t let the engineers name these things…). IC3E is in construction now and scheduled to go live in February 2021. The second development – IC3W – has DA approval and is “shovel ready.”
IC3E will bring 18MW of capacity to the portfolio. MAQ has announced that 11MW of that is sellable today, but that it is looking at ways to lift that sellable envelope beyond that 11MW, as well as the 18MW total – that’s something to look out for from here, as incremental sellable capacity delivers incremental profits, but with likely marginal incremental capital. Let’s see.
However the new news is that 10MW of that 11MW sellable IC3E capacity is already sold to an undisclosed new “wholesale” customer. Effectively IC3E is almost sold out prior to construction completion and represents a material de-risking event for MAQ.
Some context – 10MW is a huge deal in the Australian datacentre market, there have only been three “wholesale” buyers here that buy at that scale, Microsoft, Amazon and Google. Whoever the customer turns out to be, it’s another endorsement of MAQ’s capability, and bodes well for the competitiveness of MAQ’s assets and the attractiveness of the Sydney Campus location in today’s market, particularly with the IC3W development project at the same location sitting there shovel ready.
Transformational economics and arriving quicker than expected
We think the economics of IC3E at 11MW brings $25mn+ of incremental EBITDA to MAQ and is materially relative to MAQ’s existing profit pool – in F20 MAQ’s whole business delivered $65mn EBITDA (yep – MAQ’s already a long standing profitable business in its own right). And that new profit pool is arriving faster than expected. Normally datacentres take 5 to 7 years to fill, although recent DC’s in this location have gone from build to full billing a bit quicker as NextDC watchers will know.
For IC3E this will be just 2 years.
Building construction in CY20, fit-out and deploy computing infrastructure in CY21, bill at full run rate 1QCY22. That’s lightening quick in datacentre terms. And brings this material uplift to profits forward, and likely brings material upgrades to consensus earnings expectations, particularly in F23 the first full run rate year of the new contract.
Contracted economics adds to already strong funding envelope
There are two additional elements to MAQ’s equity story that we like. First, MAQ can fully fund the entire Sydney Campus development off its own balance sheet, the bring forward of the profit pool in IC3E only enhances this ability in our view.
Second, it’s not in the price. Here is the rough math.
- MAQ equity at $50 per share is $1.066bn.
- MAQ had Net Debt of $10mn on the balance sheet at F20 (Yep – MAQ had next to no debt).
- We think the capex to build the IC3E & IC3W campus, plus all the other capex required in the business over the timeframe it takes to finish the IC3W build (out to 2025) is net $600mn or so.
- During that period (F21-F25) MAQ will likely generate post tax cashflow (pre the capex itemised above) of around $400mn. That’s a long way of saying that the end of the development period we estimate MAQ have just $200mn or so of debt.
Add that all up and it’s an EV of $1.25bn, post all capex to fund the developments.
So what’s a profit pool for the business when the developments are built? Likely in the $150mn range give or take.
8x EBITDA for 30 year cashflows…
Do the math, that’s 8x EBITDA.
We think that EBITDA grows from there, and the datacentre assets have a useful life of 30 plus years. Yes, the share price has moved, and you don’t have a time machine to go back and buy MAQ at $20, but get in that imaginary time machine, fly to the future and have a look at what this business is worth when these assets are built and fully loaded. The structural tailwinds of Cloud are on your side.
For our previous insights on MAQ you might be interested in watching:
- Chris Judd and Gary Rollo talk Macquarie Telecom
- Macquarie Telecom CEO David Tudehope explains MAQ’s data centre developments
The Montgomery Small Companies Fund owns shares in Macquarie Telecom. This article was prepared 13 November 2020 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Macquarie Telecom you should seek financial advice.
Gary Rollo is the Portfolio Manager of the Montgomery Small Companies Fund. Gary joined Montgomery in August 2019 after spending three years at MHOR Asset Management in Sydney as a Founder and Portfolio Manager. Prior to this, Gary was a Portfolio Manager at Renaissance Asset Manager in Sydney for six years. Before moving to Australia, Gary spent five years in London running Morgan Stanley’s Technology Sector Equity Research Team, as well as two years covering technology companies for JP Morgan.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Ruthy
:
Hi Gary
Thanks for the analysis on Macq Tele.
Just a few thought on the data centre sector. Understanding from the demand perspective, the market is growing. How do you think about the competition between the existing players. for example, why clients will choose MAQ vs NextDC or Equinix? What is MAQ’s competative advantages in your view?
Then thinking about the barrier of entry. I understand the capital intensiveness, are there any other entry barriers, like technological barriers , or something else that you think MAQ can defend new competitors?
I am not sure if you’ve heard of the edge data centre, which refer to small, local data centre and more close to the end users. With these two types of data centres. what do you think the competative landscape will be in the next 5-10 eyars in the data center space? Can we say MAQ’s battlefield is in the large government and enterprises and the SME customers are ignored at this stage?
Finally, it’s about the the sellable capacity of the data center. my understanding is it is like retail shelve space, once it is occupied by one client, it can’t be shared by others. For example, in MAQ’s IC3E, if one client take 10MW, means it only has 8MW left to be sold. There is no or very limited scalability – if there is more demand for the data centre space, it can’t be added to the existing “shelve space”, MAQ has to build new data centres? I am not sure if my understanding is right.
Thanks Gary. Look forward to your reply.
Gary Rollo
:
Hi Ruthy.
Many questions! Lets take them 1 by 1.
Competition – In the current land grab short supply market environment there are three likely areas that offer competitive differentiation. 1. Availability of scale supply (those that have blocks of capacity available large enough to do the deals are considered more favourably than those that need to build it first). 2. In a specific location – clients tend to have a preference & MAQ have large availability in one of the most sought after locations in Australia in Sydney’s Macquarie Park. & 3. Domain competence & relationship, specifically in MAQ’s case the Government sector, for instance MAQ have built a cyber security wrapper for the Australian Government that no doubt assists in winning government business.
Barriers to entry – there are relatively few players, despite the plentifullness of capital availability for the sector and its very low cost, so competence & capability clearly come into it. As does the ability to bring a connected eco-system (clients to sell to). Once a customer is deployed the friction cost of change is high relative to the potential advantages of doing so. Build it, fill it and its an enduring asset.
Edge – A different market likely. Today the market are the hyperscale cloud platforms, who are rapidly deploying globally to capture the rapidly rising demand from corporates and governments to use their services. To make the economics work these sites require scale deployments of large amounts of specialised (optimised for performance) computing equipment. Edge DC’s won’t offer this scale. So – in my view – these will be different end markets.
MAQ’s “battlefield” – MAQ’s core customer set are SME’s and Government, they also have two hyperscale cloud service providers as clients at the existing Macquarie park site, and in the new site expansion.
Capacity availability – MAQ will sell DC space as available power capacity to the large hyperscale clients. To other clients, like its suite of hosting clients where it sells a service (at many multiple times the revenue of raw DC space and power) its MAQ’s job to ensure that the services are always available, and those IT loads go up and down, across the day and on different days, MAQ has the flex to manage those loads to some extent and hence optimise the utilisation of the DC assets and the capacity availability. Long story short hyperscale buys power capacity and there is no flex, if they want more then MAQ need to build it. Hosted clients buy a service, and MAQ has the ability to manage this load to some extent.
Hope that helps. G.