Good afternoon,

ASX200 bounced back 3.25% over the course of last week, closing at 5849, up 184 points, we are still down c. 90 points on 2 weeks ago though and 8.2% off the 2018 high (6373 on 30 August).

Resources stocks (+3.18%) outperformed Industrials (+1.84%) over the week with BHP rallying over 7% on the back of a buyback/special dividend/capital return.

Data Exchange (DXN) Details

One of my savvier Surf Coast clients requested a follow up to our recent podcast  on the Data Exchange Network (DXN, 16cps). He wanted some more details on ‘the numbers’, so given Jordan is out of the office today, I thought I’d do in the written form.

Warning: If you don’t understand DXN’s business model yet, you might have trouble following here.
DXN is building 2 data centres. 15MW each capacity (c.945 racks each). Initially, the company is installing 2.5MW of capacity at each location. You can fact-check these data points in the annual report from 31 August.

Equinix (who are a global player in data centres, EQIX-US, mkt cap $31.3bn) reported revenue per rack, per month of US$2,007 in Asia-Pacific across the 5075 racks they have installed in the region (including 375 in Melbourne.) – source: Annual Report

NextDC (NXT-AU) who you might be more familiar with as it’s also listed on the ASX (2.12bn market cap)  reported even better numbers, reporting $152.6m revenue from 35MW of billable capacity, which equates to $4.36m per MW installed. NXT don’t report per rack revenue.

In any case, this gives us a couple of ways to value DXN.

So let’s start with the initial case, where the company installs the 5MW (2.5MW per site). Based on industry analysis and discussion with the company, revenue per rack could range from AU$1700 to $2500 per rack, per month. Seems feasible given what Equinix is charging (the equivalent of AU$2,800.) Revenue from this initial build should be AU$2,000 x 325 racks x 12 months = $7.8m revenue after 12 months.

Or to spin it another way, NXT would generate revenue of $10.9m from the same installed capacity, so these numbers sort of assume DXN it’s capacity at a 30% discount to NXT’s product. Conservative enough for me.

How does this translate to share price? Well.. assuming the market prices the stock in line with other colocation data centre providers, you’d expect a revenue multiple of 7-12x, 1 year forward. Here are the listed peers globally based on current market prices:

Let’s say a multiple of 7 x $7.8m = $54.6m market cap. With 182.3m shares outstanding, that’s a share price of $0.30 per share or almost twice the current share price!

What could it be worth medium term?
Management has guided to c.$20m in revenue, per site, at capacity. That’s $40m in revenue total, on say 7x = $280m valuation.
Now, whether the company can get to this capacity without raising some incremental capital, remains to be seen, but let’s say they have issuance that results in a 20% dilution of current shareholders, shares on issue increase to 220m. That’s still a conservative valuation in excess of a $1.00. In fact, that’s $1.27 per share… and it’s still cheap relative to NextDC in terms of multiple, and probably under-earning (that calc works out at $1.33 revenue per MW vs NXT $4.36 revenue per MW) and I didn’t even mention they might be able to debt finance that requirement… if the requirement arises at all.

So there you have it. All the numbers you’ll ever need on DXN. Find me another fund manager, stockbroker, analyst or newsletter who’s going to give you that much insight and detail for free!

*Disclosure: I own a fair few DXN shares, as do my clients, who I charge fees based on the value of their portfolio. So this might be biased, just like everything else you read. Seneca has also received a corporate fee in the last 12 months from Data Exchange Network.

Black Gold & Woodside (WPL)
For all the analysis of oil/energy businesses, qualitative assessment of management teams, geological interpretation of oil fields and financial analysis.. the stocks in the sector really do just track the underlying commodity prices.

And forecasting commodity prices, especially multi-use, storable commodities like oil, is hard. It’s actually a job made harder because of the geopolitics that influences the major oil producing nations, what is sometimes economically irrational is of political interest (and vice-versa). Sitting in my office on Collins Street, I won’t be foolish enough to think that I can get an even rough gauge on supply/demand balance or proport to have some special insight into the minds of OPEC. Instead, let’s just do what we can and acknowledge that fortune favours those who play the shortest odds the most often.

Global growth is solid, the industrial production looks pretty robust… that historically has correlated with decent oil prices.

In terms of how to play it, I just stick with Woodside (WPL), there’s enough volatility in this sector without having to worry about fly-by-night management teams, poor execution and stretched balance sheets. I like WPL because they are consistent and counter-cyclical. That is, whilst the rest of the industry wasn’t investing in 2015 & 2016 (see below, growth rates fall to -10% or lower) WPL grew capital expenditures by 10-12% across those 3 years.

Why does this matter? Well it means that WPL probably have the best production growth of all their ASX peers as a result, in an far more supportive oil price environment.

Woodside also, as a result of years of investment and effort securing a near-monopoly on gas in the NW of WA, spits of enough cash to keep shareholders happy every year and still grow it’s reserves. I love the fact they control the infrastructure of the NW, charging their partners for the privilege, it’s like a toll road operator, but with growth optionality.

Movers & Shakers

The best performers for the week are made up of the worst performers over the past month with bounces in Lithium/battery mineral names (ORE, GXY, PLS, SYR, MIN) as well as the recently belted Bellamy’s (BAL, +12%, still down -28% for the quarter) and AMP (AMP +14%, still down 20% for the quarter). The high PE/strong momentum stuff also had a bit of a jump (ALU, APX, APT, RWC, TWE, A2M), energy stocks also better on the aforementioned oil price.

A market darling that didn’t bounce with the rest was Corporate Travel Limited (CTD, -26% for the week). CTD came under scrutiny from hedge fund VGI Partners who questioned the companies disclosure (summarised in the AFR here), actual profit growth and accounting practices. In my opinion, CTD has always been a bit dodgy. Not like, criminal, Enron, Ponzi-dodgy, but it just never added up to me.

Readers of this note will know my dislike of the company from an investment perspective (I last mentioned it at the end of September) and it’s probably a good example of the benefits of just avoiding things you don’t quite understand, regardless of how high the share price goes/how wrong you feel (because in 2018-world, someone else probably doesn’t understand it either and will short the living daylights out of the thing!)

Elsewhere, one of my favourite’s Ausdrill (ASL, -9% for the week) fell below its recent support level of $1.60 after completing the Barminco acquisition and informing that market that first quarter performance was in line with internal expectations, despite a number of recent contract wins and Standard & Poor’s upgrading their debt to BB.

Other than that, Property trusts (DXS, SCP, AOG, MGR) were down 3-5%.

Melbourne Cup

Public holiday here in Melbourne tomorrow, so the office will be closed/everyone’s working from home or taking the day off. I know nothing about horse racing or gambling, however, I’ll carry on the tradition with my $5 box trifecta tip… the following 4 horses in any order:

  • #9, Marmelo
  • #13, Finche
  • #11, Yucatan
  • #10, Avilius

Have a good week,