Why NextDC is still expensive after a 40% one-day crash
A blocked Melbourne grid connection wiped 36% off NextDC’s FY27 EBITDA guidance. Even after Tuesday’s 40% rout, it trades well above peers.
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Mentioned
KEY POINTS
- Jemena suspended grid connection works at M3 Melbourne amid community opposition, pushing contracted billing into FY28 and cutting FY27 underlying EBITDA guidance 36% at the midpoint
- The new guidance implies roughly 37x FY27 EV/EBITDA before the latest $1.1bn of convertible notes, versus a 22x average for global pure-play data centre peers per Goldman Sachs
- UBS sees NextDC loss-making until at least FY31 as long-term debt peaks at $11.17bn in FY30. M3 delays could also hit access to $6.7bn of undrawn senior debt
You’d think NextDC (NXT) might be close to finding a bottom after a 40% selloff over the past month. Instead, it resumed trading on Tuesday and copped another 40% haircut.
The data centre developer cut its FY27 earnings outlook after electricity distributor Jemena suspended the network connection works needed to lift grid supply to its M3 Melbourne data centre, which pushes billing of contracted capacity into FY28.
According to the AFR, Jemena paused the connections due to “safety concerns and lack of access to work sites due to community and stakeholder opposition to the work.”
The guidance cut
FY27 net revenue guidance cut to $475m-$500m from $615m-$640m, 22% lower at the midpoint
FY27 underlying EBITDA guidance cut to $245m-$265m from $385m-$410m, 36% lower at the midpoint
The affected M3 contracts contributed ~$140m of each in August guidance and carry service level credits, plus customer termination rights in some circumstances
Jemena does not expect to restart works before February 2027, while a decision on M3 Stages 6 and 7 is now pushed past the 28 November Victorian election
FY27 capex guidance cut to $4.5bn-$5.0bn from $5.25bn-$5.75bn, with all new developments and land acquisitions on hold and site sales under review
Liquidity of $8.68bn at 30 September, though NEXTDC warned M3 delays could affect its ability to draw its $6.7bn of undrawn senior debt
In August, UBS was forecasting FY27 revenue of $630.9 million and underlying EBITDA of $397.2 million. Both sit close to the midpoint of the company’s prior guidance, so the miss is essentially the size of the guidance cut.
Still not cheap
Now you might be thinking that a one-day selloff this pronounced offers a ‘cheap’ way to get data centre exposure. You'd be quite wrong.
By my numbers, the new FY27 guidance implies an EV/EBITDA multiple of around 37x for NextDC. That should be higher once you include the latest $1.1bn of convertible notes.
Last week, Goldman Sachs released a comprehensive research report on the global data centre sector. It had the average pure-play data centre stock trading at an FY27 EV/EBITDA of 22x. The list included local names like NextDC and DigiCo REIT, alongside offshore names such as Equinix, Digital Realty and Keppel DC REIT.
NextDC was already one of the more expensive names on that list at 26x. After today’s guidance downgrade, its forward multiple has ballooned to ~37x. In other words, NextDC could fall 40% and still only trade in line with global peers, which may go some way to explaining why the stock is down 40% today.
That said, this could just be a timing issue, with the lost earnings recovered in FY28-29. Before the downgrade, Goldman Sachs had NextDC delivering the strongest FY26-28 EBITDA CAGR of its pure-play peers, at 74% versus a peer average of 23%.
Any evidence that growth is back on track would go a long way to helping the shares recover.
A massive pay day for short sellers
NextDC is the market’s 28th most shorted stock, with short interest of 8.52% as at 14 October. With the stock down 40% today, that's an approximate $250 million profit for short sellers!
Where to from here?
The problem with data centre developers is that they’re massive debt junkies, and their assets are subject to massive depreciation.
UBS expects NextDC to stay loss-making through to at least FY31, even as EBITDA grows more than fourfold. Its August forecasts include:
Underlying EBITDA climbing from $249m in FY26 to $1.15bn in FY31
Depreciation and amortisation of about $500m-$575m a year
Losses peaking at $225m in FY28
Long-term debt more than doubling in FY27, from $3.28bn to $7.93bn, then peaking at $11.17bn in FY30
That mix of high debt (and the rising cost to service it) and heavy depreciation is probably why NextDC was being hammered well before today’s selloff.
Today's setback adds another layer of execution risk. Community opposition was enough to delay the project, pushing out NextDC's timeline and brings other risks with it, including its ability to draw on its debt facilities, community engagement and approvals, and the precedent it sets for pushback at other development sites.
All things considered, with the sheer amount of debt and depreciation the company faces and further operational setbacks, it’s no wonder the stock’s been so badly beaten and why short sellers are piling in.
