It certainly has been a positive day of trade for the Macquarie Telecom Group Ltd (ASX: MAQ) share price.
At lunch the data centre, cloud, cyber security, and telecom company’s shares are up 16.5% to $24.40.
Why are Macquarie Telecom’s shares rocketing higher?
This morning Macquarie Telecom announced plans to develop its Macquarie Park Data Centre Campus to 43MW and provided an update to its full-year guidance.
According to the release, the company intends to undertake a significant capacity expansion at the data centre campus through a series of phases.
Phase 1 at Macquarie Intellicentre 3 (IC3) East will allow the company to expand its data centre capacity from a total load of 10MW to 26 MW.
After which, subsequent phases will add a further 17 MW through the build-out of Macquarie IC3 West.
Management has advised that it has made the decision in order to meet the growing needs of global hyperscalers and cloud, enterprise, and Government customers.
It won’t come cheap, though. The initial capital expenditure on the IC3 East data centre will be approximately $75 million to $80 million.
The bulk of this expenditure will be incurred across calendar year 2019 and partially offset by a fee from Keppel DC REIT to the value of $26 million to $36 million for the development of IC3 (East) core and building shell.
Macquarie Telecom will then enter a 20-year lease with Keppel including options to renew. This is a similar setup to fellow data centre operator NextDC Ltd (ASX: NXT).
The first data hall in the new Intellicentre Campus will achieve practical completion in late calendar 2019.
One slight disappointment for shareholders may be the decision by management to suspend its dividend in FY 2019. But I think this is a sensible decision and believe the retained earnings will create more value for shareholders through this investment than they would being paid out as dividends.
While the capacity expansion alone is enough to get excited about, Macquarie Telecom also upgraded its guidance for FY 2018 after a strong second-half.
In FY 2018 management expects EBITDA to be in the range of $47 million and $48 million compared to previous guidance of $44 million to $46 million. This compares to EBITDA of $40.3 million in FY 2017.
Should you invest?
While I would say that Macquarie Telecom’s shares are about fair value now, I still believe they could be a fantastic long-term investment.
Along with NEXTDC and Megaport Ltd (ASX: MP1), I believe Macquarie Telecom is poised to be a big winner from the cloud computing boom which continues to accelerate. Especially after this significant capacity expansion.
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Motley Fool contributor James Mickleboro owns shares of NEXTDC Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.