A transformational deal that's not priced in

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.

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