It’s not all doom and gloom on the market today. The share price of NextDC Ltd (ASX: NXT) is surging higher and is the best performer on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index as we head into the last hour of trade.
The stock is rallying 2.8% to $6.30 at the time of writing and is well ahead of other outperformers like Mineral Resources Limited (ASX: MIN), Pilbara Minerals Ltd (ASX: PLS) and JB Hi-Fi Limited (ASX: JBH), which are all up around 1.5% each.
You won’t find many stocks in the black today with the ASX 200 benchmark tumbling 1% with only two of the 11 sectors rising.
But data centre operator NextDC is giving investors a buzz after brokers released their verdicts on its proposed takeover of its landlord Asia Pacific Data Centre Group (ASX: AJD).
It’s not a financial uplift that is exciting the market. The move is seen in a positive light by just about all the brokers covering the stock as it removes a long-running and often hostile relationship between the two companies.
While NextDC has secured long-term leases with AJD, I wrote a month ago that management didn’t need this distraction as AJD could still make life more challenging for NextDC at a time when it should be focusing on its aggressive expansion plans (click here to find out more)
I’m not saying there isn’t some financial advantage from swallowing AJD. UBS estimates that pre-tax profit could increase around $4 million in FY19 and circa $7 million in FY20.
The benefit is probably lower if you counted the cost of debt or the opportunity cost from NextDC coughing up ~$200 million for the acquisition as it is offering $2.00 a share for stock it doesn’t already own plus a 2 cents per share special dividend.
The fact is, companies like NextDC would probably be better off selling and leasing back its properties as that will free up resources for the company to pursue what it does best – offering cloud services.
I think the rebound in NextDC’s share price is sustainable because the acquisition won’t address the other elephant in the room, which is its growth profile.
Analysts have noted that sales growth in the second half of FY18 had slowed sharply from the first half and the market is waiting for confirmation from management that growth is bouncing back in the current half.
The only issue now is that NextDC has a lot less cash to play with to chase growth in a market that’s supposed to be still growing strongly.
I like NextDC, but I think it may be better to wait a bit for a market update before buying back into the stock.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. 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.