The Cut

Height Capital’s Weekly Update

It has been another interesting week, with wage increases announced and inflation figures released. In this edition we will also take a closer look at one of our core holdings, NEXTDC.

Wage increases announced 

• Fair Work Australia announced an increase to the minimum wage by 8.6% to $23.23. For the most employees who fall into specific awards, the average award wage increase was 5.25%, this has resulted in a substantial wage increase for many employees throughout Australia. This is the first time in decades that we have seen this style of broad sweeping wage increases, not matching any form of increase seen in Australia since 2000.

Inflation figures released

• Australian inflation figures were released last week. The figures illustrated that while they are reducing we are still well over the long term inflation figure set by the RBA. The Headline figure was 7.028 for the first quarter of 2023 with the Core inflation at 7.28%. In our view these are not likely to come down in the short term.  They are likely to stay above 5% in the near term due to government spending and wage growth.

• Based on the data above, we believe rates are going to increase today. Further to this we believe the market is underestimating the future rate rises and if inflation cannot be controlled in the next few months, we will see the RBA push past the market expectation of 4.1% and reach closer to 5%.

• The question for investors is when rates do peak, what will happen to the market. Below is an interesting graph from Goldman Sachs, which illustrates the market performance of the S&P 500 after rates peak. As we can see markets do perform well once rates have peaked. The question is, when will we see this peak. We don’t think we are as close as the market anticipates and therefore we are taking a conservative approach.

Stock snapshot: NEXTDC

In the third edition of The Cut, we highlighted a recent capital raising of NEXTDC (NXT), a core holding across all Height Capital model portfolios. This week, we will delve into a little more detail around the business model and investment thesis behind the holding.

NXT is a developer and operator of independent data centers in Australia, and is now beginning their regional expansion, starting with Malaysia. The business is supported by a strong thematic which is expected to drive double digit revenue growth for the medium to long term. The increased adoption of cloud technology, the continued development of the enterprise telecommunications market, and demand from public and private investors for digital infrastructure all underpin this growth profile.

Height Capital believes that these styles of businesses are a new infrastructure sector for investors. As we move towards an electronic world and data security becomes key, these organizations will be central to this transition. Basically, data centers are just big server rooms were organizations store data. Two of their well-known clients are Amazon cloud server and Google cloud server. As they continue to grow their infrastructure, we see NEXTDC as a long-term cash strategy for investors. NEXTDC’s business model is high quality, with long-term contracted recurring revenues and delivering critical infrastructure to a set of diversified customers.

Whilst the company is in its growth phase and establishing new sites, the capital expenditure profile is high, however the company has been able to historically earn margins of over 50% for earnings before interest, tax, and depreciation and amortization (EBITDA). Earnings guidance has been reiterated for FY23 which shows the company is in a strong position. The company is trading at a FY24 EV/EBITDA multiple of ~36x.

NEXTDC’s Regional Data Centre Presence

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