Goldman Sachs rates DigiCo REIT as a Buy with more than 30% upside

DigiCo REIT (ASX: DGT) was one of the most disappointing IPOs of 2024. The data centre operator successfully raised $1.99 billion at $5.0 a piece, but just two days after listing – wound up 14% lower at $4.30.

The underperformance can be attributed to two key factors: A high valuation of 43.6x FY25 adjusted EBITDA and poor timing, as the market pulled back after Fed Chair Powell dampened 2025 rate cut expectations. Despite this, Goldman Sachs sees value in the company's exposure to global data centre growth in an increasingly supply-constrained market. The analysts initiated coverage of the stock on Thursday, with a Buy rating and $5.80 target price.

Bullish Thesis

DigiCo owns a $4.0 billion portfolio, spread across 13 assets in Australia and the United States. The assets are currently billing 35MW of capacity and generating approximately $97 million in EBITDA, according to Goldman. The analysts forecast the existing portfolio to have the capacity to increase circa 7 times to 238MW of IT capacity, which could generate up to $496 million in EBITDA.

The bullish thesis and circa 30% upside (based on last close of $4.41) is predicated on three reasons.

The outlook for the global data centre industry is positive. Goldman views the US and Australian data markets as "two of the most attractive markets globally". The Australian market is forecast to grow at a faster clip than the US (CAGR of 16% between FY25-27 vs. 12% in the US), while the US market is approximately fifteen times the size.

DigiCo has a high-quality asset portfolio within these markets. The company's key Australian asset is the SYD1 facility, which is viewed as a "high-quality facility given its central location in Sydney's business district, connectivity, and development potential." They also believe that "its US portfolio provides largely risk-free near term earnings growth as CHI1 (Chicago) becomes operational."

The stock is trading at a discount to peers. DigiCo's valuation (when factoring in Chicago) appears "attractive relative to its peer set," the report said. The stock trades on an underlying FY25 EV/EBITDA of 24.6x vs. global peers on 25-29x and NextDC on 44x (or 23.8x when factoring in its longer dated contracted development pipeline).

Source: Goldman Sachs

Earnings Outlook

The analysts forecast the following financial outcomes over the short-to-medium term.

Source: Goldman Sachs (January 2025)

While the company is not forecast to turn a profit in the short-to-medium term, don't be alarmed – this is very normal for data centre businesses.

Key Risks

Despite the significant EBITDA growth, DigiCo is a capital intensive business, leaving it vulnerable to factors including:

• 38% of its assets are based in the US and currency fluctuations may result in earnings volatility

• DigiCo is largely debt funded and higher than expected interest rates may erode future profits. Goldman's macroeconomic expectations are for the rate cut cycle to commence in FY25

• The valuation and target price assume on-time development of new projects and timely conversion to billing. Failure to execute may result in earnings downgrades