nextdc - Morgans

Telco - Fixed Line│Australia│Equity research│August 31, 2017

NEXTDC Powering up for the future

ADD (no change) Current price: Target price: Previous target: Up/downside: Reuters: Bloomberg: Market cap:

A$4.25 A$5.38 A$5.01 26.5% NXT.AX NXT AU US$967.3m A$1,220m US$6.03m A$7.78m 291.2m 99.0%

Average daily turnover: Current shares o/s Free float:

■

NXT’s FY17 result was a slight beat on our forecasts and the top-end of guidance. FY18 guidance is for 14-25% yoy EBITDA growth which was in-line with consensus (and excludes any AJD impact).

■

New facility capacity has been upgraded by ~21MW (within the existing land footprint) and takes total planned capacity to 126 MWs of power, over time.

■

S2 has changed slightly and is now due to open in 1H19. However NXT has squeezed another 1MW into S1 and sizable S2 cornerstones are possible.

Result snapshot NXT reported a strong result, with EBITDA of A$49.0m at the top-end of guidance and c2% above our forecast of A$47.9m. All operating metrics grew strongly, with 38% revenue growth falling through to 77% EBITDA growth and normalised NPAT up strongly to A$11.7m. Contracted utilisation increased to 31.5MW (+21%) and billing utilisation increased to 29.5MW (+27%). Operating cash flow increased 69% on the pcp to A$44.9m and lower capex saw NXT end the period with cash and liquids of A$368m.

Noteworthy items Price Close

Relative to S&P/ASX 200 (RHS)

5.10

124.0

4.60

112.0

4.10

100.0

3.60

88.0

3.10

76.0

2.60 15

64.0

Vol m

10

5 Aug-16

Dec-16

Mar-17

Jun-17

Source: Bloomberg

Price performance Absolute (%) Relative (%)

1M 1.9 2.5

Nick Harris T +61 7 3334 4557 E [email protected] James BARKER T (61) 7 3334 4893 E [email protected]

3M -4.3 -3.4

12M 4.4 0.9

NXT’s next generation of data centres is of a higher calibre (now Tier IV Uptime Institute Certified from Tier III) which shows that NXT continues to innovate and bring improved quality to customers. B2 opens with this certification which is an Australian first. NXT provided an update on its generation 2 facilities, targeting B2 and M2 openings in late Sept/Oct 2017 and S2 in 1H19 (vs 1H18 previously). While this is slightly delayed we had minimal revenues and negative EBITDA so the delays do not have negative implications for FY18. NXT also upgraded its targeted capacity for M2 and B2 and is now forecasting 40MW (vs 25MW previously) and 12MW (vs 6 MW previously) over two stages, respectively. NXT now expects to rent the S2 land site and has entered into a 45-year lease agreement.

FY18 guidance in line with consensus; outlook remains positive NXT provided FY18 guidance, comprising: revenue of A$146-154m (including interest income); EBITDA of A$56-61m; and capex of A$220-240m (including Generation 2.0 builds). This guidance does not include any impact from NXT’s proposed takeover of AJD which is still underway. Our forecasts do not include any AJD impact (other than including in our capex the dollars NXT has already spent to acquire ~21% of AJD). We expect an update in coming weeks but have elected to wait for finalisation before including this (higher EBITDA and higher interest expenses are the likely outcome).

Investment view – Add maintained and A$5.38 PT As a result of adding additional planned capacity and rolling forward of our valuation (75% DCF; 25% FY18F EV/EBITDA), our price target increases to A$5.38 (from A$5.01). Upcoming catalysts for the stock relate to concluding the AJD takeover and the potential for cornerstone customers in S2. We continue to rate the long-term growth profile of NXT as attractive given the secular growth story. Key share price risks (both upside and downside) relate to resolution of the AJD bid and the potential for higher than anticipated sales. NXT now moves to the next stage of its evolution as its substantially larger, more efficient, and more evolved Generation 2 data centres come online over the next 12 months.

Financial Summary Revenue (A$m) Operating EBITDA (A$m) Net Profit (A$m) Normalised EPS (A$) Normalised EPS Growth FD Normalised P/E (x) DPS (A$) Dividend Yield EV/EBITDA (x) P/FCFE (x) Net Gearing P/BV (x) ROE % Change In Normalised EPS Estimates Normalised EPS/consensus EPS (x)

Jun-16A 89.3 27.73 1.76 0.008 530.0 0% 33.82 28.28 (9.6%) 3.06 0.64%

Jun-17A 117.8 47.85 11.70 0.040 422% 96.4 0% 24.34 NA (14.3%) 2.44 2.79%

Jun-18F 148.1 57.89 11.77 0.040 1% 105.1 0% 24.31 NA 32.8% 2.39 2.30% (15.6%) 0.86

Jun-19F 173.8 75.40 16.29 0.056 38% 76.0 0% 19.55 NA 44.0% 2.32 3.09% (18.9%) 0.52

Jun-20F 205.2 90.16 27.38 0.094 68% 45.2 0% 16.44 NA 43.2% 2.21 4.99% (25.4%) 0.65

SOURCE: REPORTS IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE MORGANS, COMPANY Powered by EFA FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP

Telco - Fixed Line│Australia│Equity research│August 31, 2017

Figure 1: Financial summary Profit and Loss

Data Centre Revenue Total Operating Revenue Gross profit Operating Costs EBITDA Depreciation & Amortisation EBIT Net Interest Pre-tax Profit Tax Reported Profit Exceptional items Normalised Profit

Jun-18E Jun-19E

Jun-20E

NEXTDC - valuation details

Jun-16A

Jun-17A

89.3

117.8

148.1

173.8

205.2

Share Price

$4.58

89.3

117.8

148.1

173.8

205.2

Price Target

$5.38

79.5

101.1

116.6

137.0

162.2

Total shareholder return

17.4%

51.7

53.2

58.7

61.6

72.0

Recommendation

27.7

47.8

57.9

75.4

90.2

-17.8

-23.3

-28.1

-34.2

-36.9

10.0

24.5

29.7

41.2

53.3

-8.2

-12.8

-18.0

-21.9

-16.8

1.8

11.7

11.8

19.3

36.5

Premium / discount (%)

0.0 1.8

0.0 23.0

0.0 11.8

-3.0 16.3

-9.1 27.4

Price Target

0.0

11.3 *

0.0

0.0

0.0

1.8

11.7

11.8

16.3

27.4

Market Cap A$1,332.7m

WACC

9.6%

ADD Weighting Valuation

DCF

75%

$5.80

EV/EBITDA

25%

$4.11

Weight valuation

$5.38 0.0% $5.38

Key metrics / multiples P/E

Jun-17A

Jun-18E

Jun-19E

113.9

113.3

81.9

NB FY18 guidance excludes any impact from AJD / Asia Pacific Data Centre

EPS growth (normalised)

422.5%

0.5%

38.3%

FY18 guidance revenue $146-154m (inc ~$4m interest income)

EV / EBITDA Price / Book Value Price / Assets Operating cash flow yield Free cash flow yield

26.3 2.6 2.1 3.7% n.m.

26.0 2.6 1.9 2.4% -14.7%

20.8 2.5 1.8 3.8% -4.5%

EBITDA $56-61m, Capex $220-240m * FY17 includes a one-off tax benefit which is non-cash

Cash flow statement Jun-16A Jun-17A Jun-18E Jun-19E Jun-20E EBITDA 27.7 47.8 57.9 75.4 90.2 Net interest -7.3 -9.5 -18.0 -21.9 -16.8 Tax 0.0 0.0 0.0 -3.0 -9.1 Changes in working capital 1.9 10.9 -8.3 0.2 0.1 Operating cash flow 22.3 49.3 31.6 50.7 64.3 Capex -87.3 -143.6 -228.0 -111.0 -67.0 Free Cash Flow -65.0 -94.3 -196.4 -60.3 -2.7 Acquisitions and divestments 0.0 0.0 0.0 0.0 0.0 Other Investing cash flow -2.1 -5.0 -46.0 -5.0 -5.0 Investing cash flows -89.4 -148.6 -274.0 -116.0 -72.0 Increase / decrease in Equity 120.3 146.5 0.0 0.0 0.0 Increase / decrease in Debt 100.0 38.0 0.0 0.0 0.0 Other financing cash flows -14.7 0.0 0.0 0.0 0.0 Financing cash flows 205.6 184.5 0.0 0.0 0.0 Balance Sheet Jun-16A Jun-17A Jun-18E Jun-19E Jun-20E Cash and Deposits 191.4 368.3 126.0 60.7 53.0 Debtors 18.1 16.2 27.0 31.2 36.7 Inventory 12.0 11.3 15.8 18.2 21.4 Other current assets 302.7 434.3 634.1 710.9 741.0 Total Current Assets 524.2 830.1 802.8 821.0 852.2 Fixed Assets 0.0 0.0 0.0 0.0 0.0 Investments 0.0 0.0 0.0 0.0 0.0 Goodwill & Intangibles 4.3 8.5 54.5 59.5 64.5 Other non-current assets 1.8 13.8 13.8 13.8 13.8 Total Non-Current Assets 6.1 22.3 68.3 73.3 78.3 TOTAL ASSETS 530.2 852.4 871.1 894.3 930.5 Short Term Debt 0.0 0.0 29.6 29.6 29.6 Creditors 27.0 38.6 45.6 52.4 61.3 Other current liabilities 2.7 0.3 0.3 0.3 0.3 Total Current Liabilities 29.7 38.9 75.5 82.3 91.2 Long Term Debt 159.5 296.0 266.4 266.4 266.4 Other Non current liabilities 7.9 11.0 11.0 11.0 11.0 Total Non-Current liabilities 167.4 306.9 277.4 277.4 277.4 TOTAL LIABILITIES 197.1 345.9 352.8 359.7 368.5 Issued capital 375.5 524.5 524.5 524.5 524.5 Retained earnings -45.9 -22.9 -11.1 5.1 32.5 Other reserves and FX 3.5 5.0 5.0 5.0 5.0 TOTAL EQUITY 333.1 506.5 518.3 534.6 562.0

EBITDA per share growth

Per share data Diluted shares on issue

42.3%

20.9%

30.2%

Jun-17A

Jun-18E

Jun-19E

291.0

291.2

291.4

Normalised EPS (A$)

0.04

0.04

0.06

EBITDA per share

0.16

0.20

0.26

Book value per share Asset value per share

1.74 2.18

1.78 2.44

1.83 2.54

Gearing

Jun-17A

Jun-18E

Jun-19E

Gross Debt

296.0

296.0

296.0

Net Debt

-72.4

170.0

235.3

Gross Debt / Assets Gross Debt / Equity Net Debt / EBITDA (x) EBITDA interest cover (x)

35% 58% -1.5 3.7

34% 57% 2.9 3.2

33% 55% 3.1 3.4

Gross Debt / Equity

58%

57%

55%

445.1

680.0

770.1

Jun-17A

Jun-18E

Jun-19E

32.0% 72.5% 145.8%

25.7% 21.0% 21.4%

17.3% 30.2% 38.4%

Margin analysis

Jun-17A

Jun-18E

Jun-19E

Gross profit margin EBITDA Margin

85.8% 40.6%

78.7% 39.1%

78.8% 43.4%

EBIT margin

20.8%

20.1%

23.7%

NPAT margin

9.9%

7.9%

9.4%

10.7%

8.5%

9.8%

5.6%

4.3%

5.3%

2.3% 122.9%

2.3% 85.7%

3.0% 100.3%

Jun-17A

Jun-18E

Jun-19E

2.1

3.3

4.3

Melbourne (M1+ M2 in 1H18)

13.9

16.6

17.6

Sydney (S1 + S2 in 1H19)

13.5

14.0

14.6

0.4

0.7

1.3

Invested Capital

Growth ratios Revenue EBITDA EBIT

EBITDA / Invested Capital ROIC ROE Cash flow conversion

Contracted utilisation Brisbane (B1+ B2 in 1H18)

Canberra Perth

1.5

2.3

3.0

TOTAL MW contracted

31.4

36.9

40.8

Contracted / installed MW

85%

74%

70%

Contracted / Max MW

42%

35%

39%

SOURCE: MORGANS RESEARCH, COMPANY

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Telco - Fixed Line│Australia│Equity research│August 31, 2017

Result snapshot Figure 2: FY17 result summary

123.6 74.6 49.0 39.7% 23.0

FY17 / FY16 38% 21% 77% 28% 1210%

2H17 / 1H17 14% 21% 5% -8% -81%

19.5 -6.9 12.6 24.1 506.5

44.9 -91.5 -46.5 24.1 506.5

69% 83% 99% -176% 52%

-23% -92% -121% -121% 1%

0% -65% -78% -45%

10%

10%

10%

24.6 4.7 42.9 34.7 29.9 25.9

27.7 4.5 45.0 36.0 31.5 29.5

27.7 4.5 45.0 36.0 31.5 29.5

33% 4% 5% 4% 21% 27%

13% -5% 5% 4% 5% 14%

0% 5% 0%

Profit and loss

1H16A

2H16A

FY16A

1H17A

2H17F

FY17 A

Revenue Total costs EBITDA EBITDA margin NPAT

41.3 30.0 11.4 27.5% 0.6

48.0 31.6 16.4 34.1% 1.1

89.3 61.6 27.7 31.1% 1.8

57.7 33.8 23.9 41.4% 19.3

65.9 40.8 25.1 38.1% 3.7

Operating cash flow Capex Free cash flow Net debt Equity

5.9 -37.4 -31.5 -67.1 331.3

20.6 -49.9 -29.3 -31.8 333.1

26.5 -49.9 -23.4 -31.8 333.1

25.4 -84.6 -59.1 -115.5 501.8

EBITDA (x2) / Book value equity

7%

10%

8%

Average MW billing (current and prior period end) Revenue (all in) per MW Max power available (MW) MW installed Contracted utilisation (MW) Billing utilisation (MW)

16.5 5.0 42.9 24.4 22.8 18.5

20.8 4.3 42.9 34.7 26.1 23.2

20.8 4.3 42.9 34.7 26.1 23.2

FY17 A / FY17 A / Morgans Consensus Morgans F Consensus FY17F FY17 F 6% 4% 116.7 118.9 8% 6% 68.8 70.1 2% 0% 47.9 48.8 41.0% 41.0% -13% -86% 26.4 162.2

2% 1%

-2% -62% -76% -56%

44.9 -259.6 -214.7 43.7

27.6 4.2 45.0 0.0 30.9 29.3

45.9 -241.9 -196.0 55.2

58.5

SOURCES: MORGANS, COMPANY REPORTS, numbers reported here may differ to our financial summary due to NXT calculations begin different to Morgans

NXT’s FY17 was slightly above our forecasts, with EBITDA of A$49.0m coming in at the upper end of guidance of A$46-50m. Revenue growth of 38% flowed through to EBITDA growth of 77% and reported NPAT of A$23.0m (vs A$1.8m in FY16). The result is reflective of the significant operating leverage of NXT. We have normalised our FY17 profit to include the A$11.3m tax benefit included in 1H17 results and point towards normalised profit of A$11.7m which was up 6 fold year on year. Capex of A$91.5m (A$84.6m/A$6.9m 1H/2H) was well below guidance, as already flagged to the market. This reflected a number of items including NXT’s decision to ‘lease S2 land rather than purchase’ and ‘capex timing’. We understand that broadly two-thirds of the capex not spent related to leasing rather than buying S2 land and the remaining one-third is simply timing delays (i.e. work was completed for NXT but this work had not been invoiced in time from NXT to pay for the work by 30 June 2017). Contracted and active MWs both increased by healthy amounts and this drove the large increase in EBITDA. Figure 3: MW’s contracted and MWs Billing

B1 M1 S1 P1 C1 TOTAL

Contracted MW's Morgans F Actual 2.1 2.1 13.7 13.9 13.6 13.4 1.2 1.5 0.3 0.4 30.9 31.3

A vs F 0% 1% -1% 20% 37% 1%

Billing MW's Morgans F 2.1 13.7 12.0 1.2 0.3 29.3

Actual 2.1 12.9 12.6 1.3 0.4 29.3

A vs F -1% -5% 5% 10% 23% 0%

SOURCES: MORGANS, COMPANY REPORTS

Cross connect growth remains very strong, increasing 39% yoy to 6,342.

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Telco - Fixed Line│Australia│Equity research│August 31, 2017

Figure 4: Cross connects continue to grow and NXT noted there are 8 per customer

SOURCES: MORGANS, COMPANY REPORTS

Generation 2 facilities update NXT provided an update on its generation 2 facilities (S2, B2 and M2). We note that the slight delay to these facilities does not meaningfully impact our FY18 forecasts as we did not have these facilities materially contributing in FY18 (i.e. we had assumed a longer ramp-up time for these facilities). The table below provides an update on the key metrics. Figure 5: Generation 2 facility – key metrics update B2 Facility Old (1H17) Technical space

3k sqm

Total IT capacity

6 MW

Design standard

UTI Tier III

Practical completion Target open

S2 Facility New (FY17)

Stage 1: 3k sqm; Stage 2: 3k sqm Stage 1: 6 MW; Stage 2: 6 MW UTI Tier IV

2H17

M2 Facility

Old (1H17)

New (FY17)

Old (1H17)

~8k sqm

8.7k sqm

10k+ sqm

30 MW

30 MW

25 MW

UTI Tier III

UTI Tier IV

UTI Tier III

1H18 Sept 17 (1QFY18)

New (FY17) Stage 1: 10k sqm; Stage 2: 5k sqm Stage 1: 25 MW; Stage 2: 15 MW UTI Tier IV

2H17 1QFY19

Oct 17 (2QFY19) SOURCES: MORGANS, COMPANY REPORTS

Key points include 

S2 delayed slightly; NXT to rent land: NXT is now targeting an opening time of 1QFY19 (vs previous guidance of ‘around the end of 1H18’). Notably, NXT now expects to rent the land for S2 but own the building on the land themselves. This is significant, especially in light of NXT’s current takeover of AJD that is underway. NXT has stated that the strategic rationale for the cA$210m takeover of AJD is to ‘own a greater proportion of the properties [it] operate[s]’. Little detail was provided on who the owner of the land is, however NXT noted that the S2 development would be subject to a 45 year ground lease arrangement, and we understand the owner is a large global property investor.



M2 facility capacity increased to 40 MW over two stages (from 25 MW previously). Stage 2 will consist of 5,000 sqm of technical space, with a total capacity of 15MW. M2 (stage 1) is targeted to open in October 2017. We note there is significant excess development space at NXT’s M2 location and this has the potential to be deployed in the form of large deals.

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Telco - Fixed Line│Australia│Equity research│August 31, 2017



B2 facility capacity has been doubled to 12 MW over two stages (vs 6 MW previously). This is the result of the technical space at B2 doubling to 6,000 sqm over two stages. We note that there is an unutilised car lot behind the existing B2 structure, which we expect will be used for development of stage 2. We also note that adjacent site is relatively the same sized site as the existing lot. B2 (stage 1) is targeted to open in September 2017 and we wouldn’t rule out the possibility of B2 (stage 2) having greater power density than currently envisioned.

Figure 6: B2 location site

SOURCES: MORGANS, COMPANY REPORTS

AJD takeover offer NXT has recently announced an unconditional, all-cash takeover offer of A$1.87 per security for Asia Pacific Data Centres (APDC; ticker: AJD). NXT currently owns a 21.1% stake in AJD. The takeover offer is open to all AJD shareholders th until the 14 of September, unless otherwise extended. NXT notes that its strategic rationale for the potential takeover is to ‘own a greater proportion of the properties’ that it operates. NXT notes that the offer can be funded from NXT’s existing cash and term deposits, which stood at A$368.3m as at 30 June 2017. We also note lower capex on S2 positions NXT’s balance sheet better for AJD.

S1 market rent review rd

AJD announced on the 23 of August 2017 that the determining valuer has assessed that the market rent for S1 is A$305/sqm per annum, reflecting a 7.87% rental increase relative to the existing rent of A$283/sqm. This increase will become effective from 21 December 2017 and will continue to apply unless revised under CPI adjustments or market rent reviews in the future. We note that the last independent valuation of S1 (as at 26 June 2017) was A$90m. Ultimately we expect this is irrelevant as NXT is likely to be the final owner of AJD and therefore not impacted by rent rises. That said we do not currently forecast this, as the final combination is difficult to predict.

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Telco - Fixed Line│Australia│Equity research│August 31, 2017

Outlook commentary NXT provided FY18 guidance which excludes any impact from the proposed takeover of AJD. Its underlying guidance is for: 

Revenue of A$146m to A$154m (including ~A$4m of interest income);



EBITDA of A$56-61m; and



Capex of A$220-240m.



Management noted that new customer contract wins should drive further revenue growth in FY18 and beyond. Management noted that it remained very confident on the strategy for S2 and has some substantial customerrelated announcements which it is hoping to release over the coming months.



Total planned revenue has increased to 126.1MW (from 104.1MW), reflecting the increased capacity announcements made today.



Management noted on a 5% increase in power prices in FY17 and that it has locked in power costs for CY18. We understand this means power costs will increase in 2H18 and 1H19, before hopefully stabilising again.

Changes to forecasts Following today’s result disclosure and FY18 guidance we have adjusted our forecasts to include higher revenue, costs, depreciation and interest expenses. The net result is we trim our FY18 EBITDA per share forecast by 2.4% and EPS by 15%. This is compensated for in the outer years as the larger facility power drives a higher DCF. While we have included NXT’s purchase of a 21.1% stake in AJD (consideration of A$41m) in our FY18 cash flow forecasts, we have not included a distribution payment from AJD in our income assumptions or incorporated reduced lease payments by NXT to AJD (given NXT is AJD’s sole tenant). We expect that greater clarity of outcome of NXT’s takeover offer will occur in the next few weeks and instead prefer to wait for finalising before changing our forecasts. We expect EBITDA will increase (due to not paying rent to AJD) and interest costs will increase due to debt funding the takeover (NXT has secured A$300m of senior debt from NAB which takes its gross debt available to A$600m or ~10x EBITDA). Figure 7: Changes to forecasts 2017F Forecast 116.7 47.9 15.1 5.2 16.5 291.0 -259.6 $5.32 $4.07 75% $5.01 0% $5.01

Revenue EBITDA NPAT EPS EBITDA per share Shares on issue CAPEX DCF EV/EBITDA DCF weighting Weighted valuation Premium / (discount) Price target

2017F % 2018F 2018F Actual change old revised % change 117.8 0.9% 144.9 148.1 2.2% 47.8 -0.1% 59.3 57.9 -2.4% 11.7 -22.7% 13.9 11.8 -15.6% 4.0 -22.7% 4.8 4.0 -15.6% 16.4 -0.1% 20.4 19.9 -2.5% 291.0 0.0% 291.0 291.2 0.1% -143.6 -44.7% -167.0 -228.0 36.5% $5.80 9.0% $4.11 1.2% 22.7x FY18 from 22x na 75% $5.38 7.4% 0% na $5.38 7.4% SOURCES: MORGANS, COMPANY REPORTS

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Telco - Fixed Line│Australia│Equity research│August 31, 2017

Risks and rewards NXT is a very capital intensive business so the ability to access funding (debt and or equity) on an ongoing basis, lower its cost of capital and fund future expansion is the key operational risk, in our view. NXT current sits on $368m which is substantial cash and liquids and minimises this risk in the short to medium term. We expect Net debt to increase from -$72m (net cash) in FY17 to A$170m of net debt in FY18 as NXT builds its new facility (and excluding AJD). NXT is utilising A$300m of bonds but has not yet drawn the A$300m of senior debt which it has access to from NAB. We note that NXT typically runs a conservative balance sheet capacity and, in our view, may look to top up its equity base post completion of AJD. The Generation 1 building currently generates ~A$60m of EBIT after corporate overheads and this is without Perth and Canberra having a meaningful impact. We now also have an idea of NXT’s ideal gearing range, which helps investors understand NXT’s self-funding capacity. Given NXT is considered an infrastructure investment by many, its valuation is susceptible to swings around bond rates. Higher interest rates mean the same dollar of earnings 10 years out is worth less in today’s dollars. Consequently while NXT’s cashflow and earnings do not swing around on interest rate movements, its equity value does, in the eyes of some investors. Consequently rising interest rates are, in our view, a share price risk for NXT. Perversely NXT is now lowering its cost of debt as the business has dramatically matured over the last five years and as such its cost of capital is and should continue to decline in the face of rising interest rates. This aside, the key share price risk (upside and downside) relates to the rate of sales and whether it plateaus, slows or accelerates. Faster customer demand (in the form of racks and/or whitespace) would lead to share price appreciation due to a higher fill rate (and NXT now being able to fund). Conversely, slower demand may disappoint relative to market expectations. In our view, while NXT is likely to win a substantial number of whitespace deals over the course of FY18, this style of deal typically takes 12-36 months to ramp up to paying 100%, and hence we caution about too much optimism with respect to FY19. We are very optimistic about the medium term as are Frost and Sullivan, which forecast the APAC data centre market to grow at a 14.7% CAGR from 2016 to 2022.

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Telco - Fixed Line│Australia│Equity research│August 31, 2017

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Richmond

+61 3 9916 4000

Caloundra

+61 7 5491 5422

Coffs Harbour

+61 2 6651 5700

South Yarra

+61 3 8762 1400

Gladstone

+61 7 4972 8000

Gosford

+61 2 4325 0884

Southbank

+61 3 9037 9444

Gold Coast

+61 7 5581 5777

Hurstville

+61 2 9570 5755

Traralgon

+61 3 5176 6055

Ipswich/Springfield

+61 7 3202 3995

Merimbula

+61 2 6495 2869

Warrnambool

+61 3 5559 1500

Kedron

+61 7 3350 9000

Neutral Bay

+61 2 8969 7500

Mackay

+61 7 4957 3033

Newcastle

+61 2 4926 4044

Milton

+61 7 3114 8600

Newport

+61 2 9998 4200

Australian Capital Territory

Noosa

+61 7 5449 9511

Orange

+61 2 6361 9166

Canberra

Redcliffe

+61 7 3897 3999

Port Macquarie

+61 2 6583 1735

Rockhampton

+61 7 4922 5855

Scone

+61 2 6544 3144

Northern Territory

Spring Hill

+61 7 3833 9333

Sydney: Level 7 Currency House

+61 2 8216 5111

Darwin

Sunshine Coast

+61 7 5479 2757

Sydney: Grosvenor Place

+61 2 8215 5000

Tasmania

Toowoomba

+61 7 4639 1277

Sydney Reynolds Securities

+61 2 9373 4452

Townsville

+61 7 4725 5787

Wollongong

+61 2 4227 3022

South Australia

Hobart

+61 2 6232 4999

+61 8 8981 9555

+61 3 6236 9000

Disclaimer The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk. This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.

Disclosure of interest Morgans may from time to time hold an interest in any security referred to in this report and may, as principal or agent, sell such interests. Morgans may previously have acted as manager or co-manager of a public offering of any such securities. Morgans affiliates may provide or have provided banking services or corporate finance to the companies referred to in the report. The knowledge of affiliates concerning such services may not be reflected in this report. Morgans advises that it may earn brokerage, commissions, fees or other benefits and advantages, direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities. Some or all of Morgans Authorised Representatives may be remunerated wholly or partly by way of commission.

Regulatory disclosures Analyst owns shares in the following mentioned company(ies): NEXTDC Disclaimer: Morgans Corporate has been appointed as a Corporate adviser to 360 Capital Group.

Recommendation structure For a full explanation of the recommendation structure, refer to our website at http://www.morgans.com.au/research_disclaimer

Research team For analyst qualifications and experience, refer to our website at http://www.morgans.com.au/research-and-markets/our-research-team

Stocks under coverage For a full list of stocks under coverage, refer to our website at http://www.morgans.com.au/research-and-markets/company-analysis/ASX100-Companies-under-coverage and http://www.morgans.com.au/research-and-markets/company-analysis/EX-100-Companies-under-coverage

Stock selection process For an overview on the stock selection process, refer to our website at http://www.morgans.com.au/research-and-markets/company-analysis

www.morgans.com.au If you no longer wish to receive Morgans publications please contact your local Morgans branch or write to GPO Box 202 Brisbane QLD 4001 and include your account details. 06.07.17

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