Megaport Limited

Company Overview: Megaport Limited (MP1.ASX) has its headquarters in Fortitude Valley, Australia. The company is engaged in providing Elastic Interconnection Service for connecting secure and on-demand connections between enterprises, networks, and services. MP1’s global platform enables customers to rapidly connect their network to other services across the Megaport Network using Software Defined Networking (SDN). The company connects over 2,400 customers in more than 760 enabled data centres worldwide.

MP1 Details

MP1 Rides on Strategic Alliance & Decent Liquidity Position: The company has reported robust growth across its operating metrics in 1HFY22, with an addition of 170 new customers. In 1HFY22, the company recorded remarkable 23% growth in monthly recurring revenue (MRR), compared to 30 June 2021. Few of the top partners and customers of Megaport include Alibaba, Amazon, Google, IBM, Microsoft, Nutanix, Oracle, Salesforce, Disney, Express Connect Partner and SAP PartnerEdge Open Ecosystem Partner, etc.

Spotlight 1HFY22 Key Numbers:

• Robust Top Line Performance: In 1HFY22, the company’s total revenues increased 42% year over year and came in at $51.2 million. In 1HFY22, MP1 remained on track to drive consistent growth across all key metrics, including customers, Ports, MRR, the number of Installed Data Centres, and Services.
• Improvement in Net Loss: During the period, the company recorded a net loss of $20.2 million, depicting an improvement of 47%. Profit after direct costs stood at $30.9 million, an improvement by $12.7 million year over year, driven by revenue growth and a controlled network cost. In addition, normalised EBITDA loss showed an improvement of 16.9% on a year over year basis.
• Other Operational Metrics: Total monthly recurring revenue for the period stood at $9.2 million, up 46% from the month of December 2020. Total Installed Data Centres for the period increased to 411. The company witnessed robust cloud partnerships and remains focused on continuous execution, network expansion, and achieving operational goals.
• Robust Customer Base: During the period, the company recorded 2,455 customers across 768 Enabled Data Centres in 190 cities. Out of these, 420 were located in North America, 208 in EMEA and 140 in Asia Pacific.
• Balance Sheet & Liquidity Position: The company has built a decent balance sheet position with cash and cash equivalents of $104.6 million. Total debt at the end of the period amounted to ~21.6 million. The period also saw record cash receipts, amounting to $55.04 million, up from $43.08 reported in the year-ago period.
• Key Developments: During the period, the company unveiled the PartnerVantage portal supporting indirect partners to resell Megaport services. Additionally, strategic alliances with TD SYNNEX and Arrow Electronics make MP1 the first NaaS platform to facilitate software-defined cloud interconnection services. The company also remains on track to provide a virtualised network functionality platform to enable businesses to connect to services via Megaport from different places worldwide.

Revenue Split by Geography; Analysis by Kalkine Group

Key Metrics: For 1HFY22, the company reported a gross margin of 60.4%, higher than the year-ago figure of 50.6%. In 1HFY22, the company recorded a current ratio of 3.11x, higher than the industry median of 2.41x.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 39.5% of the total shareholdings, while the top 4 constitute the maximum holding. First Sentier Investors held the maximum number of shares with a percentage holding of 7.12%, followed by Slattery (Bevan Andrew) holding of 7.01%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: The COVID-19 global disruptions and stiff competition in the markets where MP1 operates, and regulatory concerns may dampen financial performance. Further, foreign currency fluctuation risks and government restrictions add to the woes. The company is exposed to the risk related to a breach of information security that could result in loss of customers and revenue and could adversely affect the company’s future financial performance.

Future View: With the integration of the InnovoStudio service with Megaport’s NaaS platforms, the company remain on track to launch Megaport ONE, a SaaS-based platform that enables connectivity and control to the cloud and offers holistic IT solutions to their customers, thus enabling critical network, compute, and application resources in real-time. The company also expects to expand its total addressable market and drive more uptake of Megaport services via its Technology Partner pipeline for Megaport Virtual Edge (MVE), and Internet Exchange (IX), thereby providing more choices to its customers. The company’s healthy balance sheet and skilled management team and its long-term nature of customer relationships place the company for considerable long-term growth.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~36.79% in the past three-months. Currently, the stock is trading close to its 52-week low level of $10.67. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount as compared to its peers, considering losses in 1HFY22, COVID-19 led global disruptions, technology disruptions, etc. For the purpose of valuation, peers such as Altium Ltd (ASX: ALU), Xero Ltd (ASX: XRO), NEXTDC Ltd (ASX: NXT), and others have been considered. Considering decent liquidity position, rise in top-line, positive long-term outlook, robust customer base, product launches, current trading levels, indicative upside in the valuation, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $13.20, as on 11 March 2022, 11.45 AM (GMT+10), Sydney, Eastern Australia. 

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.  

MP1 Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:-

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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