Stock in the Spotlight: Macquarie Telecom

Friday, March 15th, 2019

Macquarie Telecom (ASX:MAQ) recently delivered a solid 1H19 result headlined by EBITDA of $25.5m for the half, up 14% and in line with expectations. Management provided first-time FY19 guidance of $51-$53m, implying growth of 10% for the fiscal year.

The results again demonstrate successful execution against its multi-year strategy to expand the Hosting business, which is benefitting from the global trend of IT resources transitioning to the cloud. MAQ has established itself in Australia as a specialist in hybrid cloud services for medium to large enterprises, boasting an industry-leading Net Promotor Score (NPS) of +74.

In 1H19, Hosting EBITDA grew to 14% $15m. The Telco business also pleased with EBITDA of $10m, up 12% on slightly lower revenues due to the cost insourcing program during FY18.

The investment case for MAQ mainly centres around the ongoing expansion of the Hosting segment. Over the next 18 months, MAQ will construct its fourth and largest datacentre, Intellicentre 3, complementing the existing Intellicentre 2 at its Macquarie Park campus.

On completion, the project will almost quadruple MAQ’s Hosting capacity from 12.5MW to 47MW, effectively underwriting several years of strong earnings growth.

We also see potential for MAQ’s reinvigorated Telco business after a few flat years due to the roll out of the new SD-WAN to business clients during 2019, as well as the recent NBN wholesale supply agreement.

From a valuation perspective, we see solid opportunity in MAQ.

The first thing to note on this front is that Hosting is quite capital intensive, which can distort the picture. This is made clearer when capital expenditure is broken up into maintenance and growth capex. This way we can value the existing business separately.

The table below summarises FY19 guidance for EBITDA and the various layers of capital expenditure, including Growth (buildings), Customer (provisioning customers), and Maintenance (technology and internal systems refresh).

Taking $52m EBITDA and subtracting $13.5m of maintenance capex, we get $38.5m as a proxy for pre-tax earnings of the existing operations. Post-tax this equates to earnings of approximately $27m. At the current share price of $19.50 MAQ’s enterprise value is $397m, or a multiple of 14.7 times the (indicative) earnings of the existing business.

This is interesting because it suggests future value creation via the substantial expansion of the Hosting business is not priced in. The new facility at Macquarie Park will likely require capex totalling $400m. Historically MAQ has generated EBITDA returns on incremental capex of around 30%. As such we see a bright long term future for MAQ and we see it as a solid strategic holding.

 

Clime Group owns shares in MAQ.

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