Going to have to disagree with the $4 valuation for Nextdc.
This company is expanding rapidly to keep up with the huge demand for cloud-based storage. So, the recent CAPEX explains why the jump in depreciation expense has resulted in an accounting loss.
Looks like there were some accounting adjustments in FY20 that also contributed to the loss.
"The loss after tax included income tax expense of $26.4 million that arose due to the Group’s decision to derecognise carried-forward tax losses and temporary differences,that it believed no longer met the requirement to be recognised, stemming from the impact of recent growth and expansion activity on taxable profits. Despite the derecognition, these carried-forward tax losses and offsets can be carried forward indefinitely and have no expiry date"
When these guys build data centres, there is no pre-sales commitment from potential customers, so they run the risk that initially the sales generated will be highly unprofitable in the short term. Over time, they fit out these data centres and expand their storage capabilities to meet the demand.
Admittedly, this is a capital intensive business but they are definitely being propelled by a broader macro tailwind in my opinion.
Massive debt facility to reduce finance costs, covid-accelerated demand for cloud, decent economic moat given the capital intensive nature of the business.
The valuation is priced for growth, but I think it will take some years for this CAPEX to be expensed out and that's when its data centres will be able to be maxed out at a higher capacity.
- NXT have raised $1.8b of investors money and there is no signs of any emerging profitability. FY20 NPAT of negative $45m
- Historically expensive debt stack FY20: $800m, now refinanced to a whopping $1.5bn facility
- To even establish a ROE of 10%, it would require NPAT of $180m (on $1.8m of contributed equity)
- If they were able to, one day, become profitable. At a 5% NPAT margin they would need to return $3.6bn in revenue to support $180m NPAT or a 10% ROE. At a current revenue of c.$200-250m this would require 1439900% revenue growth with no further equity contribution
- Will they be able to turn a profit, and if so, achieve a decent return on equity?