NextDC (NXT) – BUY

Introduction

Little Hedge strives to close the information asymmetry that exists in the Australian small to mid cap investment space. Whilst there is a plethora of great research and information on Australian large cap stocks such as the “Big Four Banks” and resource giants like BHP and Rio Tinto, there is a huge shortfall when it comes to access to quality ideas at the smaller end of the investment spectrum. Little Hedge are closing this gap by providing free, easy to understand, comprehensive and insightful research to everyday Australians on small cap stocks. Our first article will be an in depth look at Australia’s only listed Data Centre company NextDC (NXT). Enjoy!

Business overview

NextDC is Australia’s leading neutral data centre operator and is the only provider to offer a true national footprint with data centres (DC’s) in every major Australian city (Melbourne, Sydney, Perth, Canberra and Brisbane). NXT’s model includes both developing and operating carrier and systems integrator neutral DC’s and offers customers space, cooling, power and security to store and operate their network, data and IT infrastructure requirements. NXT is currently in the process of building out three new DC’s in Melbourne, Sydney and Brisbane with first completion expected in 2H17.

Why we like it

NXT DC is the cleanest and more pure way to gain exposure to the explosion in cloud computing expected in Australia. Little Hedge are very bullish about the growth of cloud and data usage in general, however we also believe that NXT is an extremely well managed corporate and is clearly ahead of the competition as the leading DC operator in Australia. Little Hedge is attracted to NXT given its competitive advantage over peers from its diversified client offering, true national footprint, peer leading returns and further scalability yet to be realised and very sound track record through its relatively short listed life. Below are the key reasons why we believe the cloud thematic has the most attractive growth potential over the next 5 years and how the expansion of cloud will greatly benefit NXT and it’s shareholders! The roll-out of the National Broadband Network will drive greater consumption of public cloud – this will only benefit DC operators! Big global brands such as Apple, Microsoft, Dropbox and Amazon will drive significant growth in the amount of data storage space required domestically and Next DC stands to reap the benefits as Australia’s leading and only listed DC operator. Globally and in particular Australia is still in the early stages of a rapid growth cycle in cloud adoption. Little Hedge believes more efficient, cheaper broadband and increased take up nationally will only fuel further demand from cloud providers and users. Demand for data and 3 rd party DC’s is real; This is in part driven by companies continuing to outsource to cheaper more efficient operators like NXT and the rapid rise in Data/IP traffic. Industry consultants Frost & Sullivan forecast the Australian market for data to more than double to $2.1bn by 2021. Additionally, a real benefit for companies to outsource to DC operators is the opportunity for customers to partner, connect and co share with others within the ecosystem. NXT is the leading Australian provider of collocation services. Cisco forecast Asia Pacific internet traffic to grow at 22% CAGR from 2015-20 and data volume in DC’s to rise by 42% CAGR from 2015-2020 – NXT is well placed to reap the benefits given its national infrastructure makes it easier for global/APAC companies to integrate and co-share data. Figure 1. Cisco VNI Forecasts 194 EB per Month of IP Traffic by 2020 Finally, if you are having difficulty imagining what will drive this rapid growth in data storage and consumption, the answer is simple. The world is rapidly evolving as a result of technological change. The world’s largest corporations such as Apple, Facebook, Microsoft and Amazon are International powerhouses when it comes to data creation and consumption. In a world where Uber has no taxi fleet, Airbnb owns no hotels and Alibaba doesn’t have a shop front, the growth and success of these modern day giants is dependent on their ability to create and use their data. Whilst the “Internet of Things” is still fledgling, growth in smart technology devices requires growth in data storage.

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