Infrastructure assets for the digital economy – Data Centres
Technology was once a major competitive advantage for large companies, today that’s no longer the case, smaller companies can now compete on a level technology playing field thanks to Cloud Computing and the Digital Economy. It’s why we believe that small companies represent an attractive area for investing.
In the Montgomery Small Caps Management Video Series, I talk with companies we own in the fund to help investors get under the hood of the small and emerging companies we invest in.
Today we have Craig Scroggie, Chief Executive Officer of NEXTDC (ASX:NXT). NEXTDC is a powerful structural growth story. Their infrastructure is behind some of the brand names that power the internet. The company was founded in 2010 to build a national network of carrier and vendor neutral data centres around Australia. They have a relatively small share of the market, approximately 10-12 per cent. The rate of growth today on public and private cloud numbers that are being forecast are just astronomical.
In this video, you will learn about the business model, what a data centre operator actually is, the relevance of cloud computing and the big picture drivers of this business.
“I think the first thing to recognize is that data centres are an infrastructure asset. They are a capital-intense piece of infrastructure. We don’t directly compete against an organization like a Microsoft or Amazon. They’re essentially, for us, an important customer or a partner and we’re helping them build the global scale that they need in their infrastructure platform to deploy their computing services.” Craig Scroggie
We like NEXTDC’s combination of exposure to strong growth themes, management with a proven track record of developing high quality assets and making good returns. The quality and duration of the company assets, the upcoming completion of the S2 data centre project and the scope for considerable valuation growth over time should act as significant catalyst for future growth.
We look forward to your comments on the video.
You can view our other video interviews here: MONTGOMERY SMALL CAPS MANAGEMENT VIDEO SERIES
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.
paul norris
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I understand the use of EBITDA to try and compare apples with apples, but to say 50 million EBITDA after spending 150 million means “your’e getting a return of your money back in 3 years” is not realistic, ignoring all the other costs.
Gary Rollo
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Paul. Thanks for your comment – there are some cash costs below EBITDA that would need to be considered. For example, cash maintenance capex (costs not expensed in opex before EBITDA) however this is low especially in the early years of a 30 year asset, tax (whilst capital structure dependent) is also another cost to consider although the impact of DA a non cash “cost” that does represent a meaningful cash tax shield for capital intensive assets like those in NXT’s portfolio. All up you are right there are other cash costs than are included in EBITDA, however due to the tax shield that significant DA represents relative to EBITDA, means that EBITDA may be a reasonable approximation to cashflows +/- tolerance for the type of discussion we were having on video. Hope that helps. Gary
John
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Another interesting small cap – not sure about this mostly because it is not something I am familiar with. two questions come to mind
1)how important is the location of the data – what is the distance limits. When automated vehicles come on line how far can they be spaced?
2) is there a moat, once ones data is stored isn’t easy to move else where or does these brands develop a reputation as being safe, reliable and secure – also wont new technologies make this storage obsolete ?
Gary Rollo
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John, thanks for your questions. Data Centre Location – Its important. Data centres are locations where data/information is exchanged, and some of the systems that use this information do so in real-time. The time taken to get the data to the data centre, process it and get an answer back to the user, is called latency. And for some uses, or applications, low latency is important as it can impact the quality of the user experience – an example might be streaming video that doesn’t buffer or stop when you are trying to watch it. Regarding your specific question re Automated vehicles, we don’t know yet as these solutions are not yet commercial. Does a Data Centre have a moat? We think the competitive defense of moat of a DC, like those in NXT’s portfolio, includes its location and its connectivity density (how many customers all come there to exchange traffic). NXT’s DC’s are some of the most inter-connected in Australia, hosting some of the major cloud vendors, to whom many many other customers and service providers want to connect. An eco-system in its own right, a bit like a market or a stock exchange where many parties come to trade, or in this case exchange information or data. Hope that helps. Gary
John
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Thanks Gary – well thought out responses here. The only issue I see is if the technology of storage improves substantially. I guessing when automated vehicles hit the road there will need to be huge amounts of data storage with low latency to make this system work efficiently. The question is whether this data will be able to be stored in a small box beside the road (with low latency) or whether these huge data centres will be needed. There is also the potential for these companies to transition into these types of service though.