Buy: Macquarie Telecom (ASX:MAQ) $49.41
Macquarie Telecom owns and operates a 43MW data centre (DC) complex located 15 minutes north of Sydney’s CBD, as well as offering customers cloud and telecommunication services.
We think the risk-reward equation for investors at the current share price is attractive, with the expansion of the DC complex set to see profits double by FY24. Importantly, this growth is completely self-funded by the existing free cash flow in the business as data centres.
MAQ’s Cloud Services & Government division is growing even faster than its DCs, and with 80-odd customer wins in the previous 12-month period, we see substantial scope for incremental revenue growth in the forward period.
MAQ offers investors industry-leading net promoter scores, low customer churn, an impeccable track record of revenue growth, EBITDA growth and project execution, all for a modest 15 times EV/EBITDA multiple, based on global comparable peers with less credibility and more modest growth outlooks.
Hold: CSR Ltd (ASX: CSR) $5.64
We have and will continue to be constructive on the Australian residential housing market; however, at 10 times EV/EBITDA, we see CSR as fully priced given the available data. This said, further upside to building approvals data or protracted price buoyancy could see continued upward pressure on product margins and CSR’s earnings. We see this sort of momentum as reasonably likely, given the interest rate environment and structural shift in society where people spend more time at home each week. The risk-reward equation is fairly balanced in our view, with a slight bias to the upside from here.
Sell: AGL Energy (ASX:AGL) $9.50
AGL is an electricity retailer that operates in a challenging and increasingly competitive environment. The company recently announced the business was splitting itself in two, with coal-fired and gas-fired generation being housed in “PrimeCo” while renewables will live inside “NewAGL”.
AGL currently operates at negative net margins and while we do see a normalisation of retail electricity prices medium term, we see Origin Energy (ASX: ORG) as occupying a far superior strategic position, particularly relative to “PrimeCo,” which we expect to have rising maintenance and reliability costs.
While some investors may get excited about a new green-washed AGL and the potential re-rating that may follow, we still see significant uncertainty and risks in the short term for both divisions under the new structure.
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