Investor interest has long centred on sector big daddy NextDC (NXT), which is trading near record high levels despite (or because of) a monster $672 million placement and $191 million share purchase plan.

Mid-tier Macquarie Telecom (MAQ) recently said it would build a second Canberra DC to cater for government needs, part of the diversified telco’s $100 million debt-funded DC spend for the year. The company also has three DCs at Sydney’s Macquarie Park (one of them under construction).

Dubbed Intellicentre 5, the Canberra facility will deploy “the latest physical and virtual” security credentials.

“(The) risk to government of a cyber breach and the dependency on cloud services are at an all time high,” said Macquarie’s government division chief Aidan Tudehope – a prescient remark given the Prime Minister disclosed a massive cyber breach a week later.

He added: “we’re not just going to return to the norm after this pandemic and facilities of this calibre are an essential requirement in Canberra.”

In truth, the hyperscale suppliers of  NextDC and the US-based Equinix will win the contracts from the likes of Amazon and Google.

In the meantime, punters haven’t forgotten the listed small fries, who are forging different paths in what remains a highly-fragmented market.

Prefabricated data centre operator DXN Ltd (DXN) in early June copped an ASX ‘speeding ticket’ after its shares soared from 1.3 cents to 2.4 cents over two days. Half of the company’s register changed hands over seven days.

In May, DXN raised a chunky $5.9 million in a rights offer, with the proceeds used partly to finance the $2.7 million acquisition of a Hobart data centre. This purchase has now been completed.

Despite the Covid 5G tower  conspiracy nutters, the diversified 5G Networks (5GN) raised $18.3 million in a placement and then reaped a further $4 million in a share purchase plan.

In reality, 5G investors have also enjoyed the pandemic – if that’s the right word – with the shares also trading near record levels.

The company this week reported a $1.5 million loss for the 2019-20 year but almost doubled its underlying earnings to $6.3 million, with its data centre revenue also doubling despite running at less than 50% capacity.

Management expects this year’s earnings (ebitda) to increase to $8-8.5 million, on overall revenue of $60-65 million, compared with last year’s $49.8 million (down 1.4%).

In theory, data centres shouldn’t be that alluring. After all, they’re just large temperature controlled warehouses with racks that house thousands of client servers. Prerequisites are a handy yet cost effective location and access to decent energy supply (they consume a poultice of electricity).

The rise of ‘cloud’ computing means an ever greater need to store data, a trend accelerated by the use of videoconferencing during pandemic lockdowns.

5GN chief Joe Demase says COVID-19 has prompted more clients to move their servers out of the office and into data centres – and doesn’t expect this migration to be temporary. “We have been driving for a while to move them off premises to a DC where we can manage and support their infrastructure, but we think it’s really going to speed up now.”

 “(Clients) don’t want to be locked down without the flexibility to scale up and down and it certainly helps them with remote working.”

For DXN, the Hobart purchase supplements its DCs at Sydney’s Olympic Park and Port Melbourne’s “cloud alley”, where both Next DC and Equinix have centres. “We want to be located where we see a competitive advantage,” says CEO Matthew Madden. “There are three data centres in Tasmania for the entire population and two are for power companies and not for public access.”

DXN also supplies portable modular data centres within shipping containers. Customers can either run the centres themselves, or contract DXN to do so.

Madden says while the virus has delayed some decisions, overall it has bought forward three years of activity in the sector.

Meanwhile, 5G is not just acquiring data centres, but building fibre cable networks to connect them more effectively.

The company is doing “heavy due diligence” on two or three centres that would add to its existing facilities in Sydney (two) and Melbourne (one). The company also rents a portion of an Adelaide DC.

5G has built its own fibre networks in Melbourne CBD and St Kilda Rd and in Sydney’s Pyrmont and is about to roll out more cable in the Sydney, Brisbane and Adelaide CBDs. Overall the company has budgeted $3-4 million to connect 67 data centres.

“We think this will be the real growth in the future: clients want high connectivity to a particular DC,” CEO Joe Demase says.

5G’s greater fortunes also lie in cross-selling series to its base of 2,500 customers (mainly mid-market corporates). “Most of buying one service from us but we would like to get that to two and a half or three,” Demase says.

“If we are selling them a network connection, we also want to sell them a cloud solution and some data centre (capacity).”

He adds that rather than selling a client a $500,000 server, the company would rather sell them a cloud services deal and reap $15,000 to $20,000 of ongoing monthly revenue.

Macquarie will report its data centre division separately from this financial year, which should provide clarity around its earnings contribution.

Overall, management forecasts 2019-20 ebitda of $63-66 million, around 24% better than previously.

At the time of writing, DXN and 5G were valued by the market at $28 million and $167 million respectively, a far cry from NextDC’s $5.4 billion or the $1 billion ascribed to Macquarie Telecom.

Tim Boreham edits The New Criterion ([email protected])

Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.