Wednesday, 12 February 2014

Telecity in the mid 600s again: embrace volatility

The last time I wrote about Telecity, the data centre infrastructure provider, was in early December when the share was in the mid 600s.  Well, here we are again...


So what was disappointing about the numbers earlier today?  At face value 15-18% growth in both revenue and ebitda plus a 40% rise in the dividend (to a 1.5%+ yield now) seems attractive enough. 
Note the last comment though: just what is 'solid earnings growth' and can it justify the prospective x15s P/E valuation the company is on?

Taking a step back first, from a structural theme perspective, the company remains in a good spot, as this slide from their presentation pack shows.

 

 
Even the best structural themes though have practical issues to consider.  Other numbers from the earnings release to complement the headline 15-18% revenue/ebitda growth would be:
  • +12.3% FX neutral revenue growth
  • 90% recurring revenue
  • 9% churn
  • +0.3% rise in revenue per kW
  • +2.9% rise in ebita per kW
There is some good and bad here.  The recurring revenue is great and the churn rates not woefully dis-similar to a BSkyB (and not going worse either).  The 2-3% point benefit from FX can be seen in the FX neutral numbers.  FX related issues will continue as non-UK business wins continue to outpace UK-centric ones. 


For me though, the most interesting statistics are the latter two which show that pricing is under some pressure. 

Now part of this can be linked to some rise in competition but - as noted in the December note - this area is quite oligopolistic and does have barriers-to-entry.  Additionally, returns do ramp up as data centres mature.  There will be some negative mix issues in these numbers too. 
 
The other aspect is to look at the cash flow side.  Pre M&A and dividend the company did generate around £10m of free cash during the year.  With £300m of net debt and a facility worth £100m more than this, I don't see any issues today.  Looking forward the company did guide for slightly higher overall capex (£110-130m pa) but, as noted in the chart above, they should anticipate higher underlying cash flows too.  I would say this should not be a huge concern today for the market. 

 
Investors are left with the question of what valuation they should attribute.  Personally I think a prospective FY2014 valuation of around a x15 P/E and a x14s EV/ebit is indicating value. I continue to expect the company to grow at a double digit rate.  Structurally the demand is there for their product plus due to the importance of both sites and know-how, it is not an easy area to get into.  I have (re)embraced the 650s share price level again today. 

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