Megaport Ltd (ASX: MP1) shares have been on fire this year.
Since the start of the year, the cloud infrastructure provider's shares have risen almost 50%.
That is despite the company's shares pulling back 25% from their 52-week high.
The good news is that the team at Bell Potter doesn't believe it is too late to climb on board the Megaport train.
In fact, the broker believes there's potential for big returns over the next 12 months.
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What is Bell Potter saying?
Bell Potter notes that in its recent initiation note it underestimated Megaport's growth potential and has upgraded its estimates to account for its recent contracts update. It said:
We have reviewed our forecasts for Megaport post our recent initiation and also the contracts update in late September and decided we were too low, particularly in FY28. The key rationale is we estimate the annual underlying EBITDA from the GPU pool to be around $200m when fully utilised and, given this will ramp up in 1HFY28, we expect the EBITDA contribution in FY28 to be around $100m.
This will add to the underlying EBITDA of the core business which Megaport said in its recent contracts update will have an exit run-rate of >$650m in FY27. The total underlying EBITDA in FY28, therefore, should be >$750m and this is before any growth in the Network Services business which recently has been growing its top line in the mid to high teens and is expected to continue doing so for at least the short to medium term. All this makes our original underlying EBITDA forecast of $726m look too low and suggests a total figure of up around $770m looks more appropriate.
Big potential returns
Although Bell Potter has trimmed its valuation to reflect changes in peer multiples, it still sees potential for big returns between now and this time next year.
According to the note, the broker has retained its buy rating on Megaport shares with a price target of $26.00 (from $27.00).
Based on its current share price of $17.39, this implies potential upside of approximately 50%.
Commenting on its view of the stock, Bell Potter said:
We have reduced the multiple we apply in our EV/EBITDA valuation from 10x to 9x and increased the WACC we apply in the DCF from 10.1% to 10.3% given the recent weakness in the share prices of both the domestic and offshore comps. The net result is a 4% decrease in our target price to $26.00 which is still a material premium to the share price so we maintain our BUY recommendation.
We continue to have a positive view on the stock due to valuation (FY28 EV/EBITDA of only 6x), strong forecast growth (which is fully funded), track record of execution, high visibility of earnings, AI exposure and differentiated business model (distributed inference).
