Hi Lizard / Mark100,
Update on MAQ.
I believe MAQ is at inflection point in terms of its growth and profitability. Future growth will come from the new data centre Intellicentre II (IC2) as well as the higher margins that Intellicentre I (IC1) will continue to earn as it improves and increased the portion of IC1 that operates under managed hosting solution rather than co-location. Macquarie has recently announced a new initiative to
improve how managed hosting service is billed by offering monthly rates for access to additional computing capacity. This initiative should further enhance growth.
Although IC1 has been in existence since 2001, it has only been in the past two years where increased profitability from the hosting segment has resulted from the shift up the value chain from managed hosting from co-location.
IC2 will be financed completely out of internal resources so there will be no share dilution. This should significantly improve ROE as cash resources are deployed into a high margin business. The fixed line segment of the business is declining but is complementary to the other service offerings as they
form an integrated package.
MAQ’s competitive advantage
This stems from three factors:
1. The ability to offer a managed hosting service. This requires extensive experience which MAQ have built up over the last decade whereas its competitors largely only offer the space (co-location offering) to run their own equipment. A managed hosting service is higher up the value chain than co-location.
2. Providing a mission critical service. MAQ offers the highest levels of accreditation of any data centre in Australia. It is a Tier 4 Data Centre which is the highest level and most suitable data centre for providing a mission critical service. Clients which cannot afford for their hosting to be offline at all, and are willing to pay a premium for this service use MAQ’s solutions. This gives MAQ important pricing power.
3. Strong reputation. MAQ’s strong reputation in the mission critical space is a great draw card to attract other clients and acts as a barrier to entry for unproven new competitors.
Strong economic fundamentals
Data centre demand is expected to increase from increased use of internet applications such as cloud computing as connections speeds increase.
The supply side is also improving. Although more data centres are coming online Macquarie is able to differentiate itself with its reputation and expertise.
Competitors
MAQ focuses on the niche market avoding small and medium enterprise market like Telstra and Optus but also avoiding the very large corporations.
NextDC (NXT) is a listed competitor but they focus on co-location rather than managed services.
Future growth
The hosting business sales and EBITDA has been growing at a CAGR of 23.5% and 35% respectively from 2007-2010. Recently the MD of the hosting division predicted that the enterprise cloud services would help its hosting division maintain annual profit growth of 30 percent.
Risks
- Decline in Telco business
- Outages and loss of reputation in hosting
- Change in market dynamics in hosting and consequent decrease in demand
- Offshore hosting. However, government agencies require hosting to be held in Australia for security purposes.
- Esatblished competitors entering managed hosting market
Valuation
I have them on a FY11 doing $42.9m EBITDA. The company has guided $37-$39m EBITDA but I think this will prove to be conservative as they have a history of beating guidance.
Although the share price has had a strong run since the sell down from AAPT in July 10 and I am not usually a fan of stocks that have appreciated significantly, I believe the future growth potential is unrecognised by the market. I can see $13 in the near term with $16-$18 target in medium term once IC2 ramps up operations.
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Originally Posted by ob1kinobi
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