INXN

Publicly traded companies mentioned herein: CyrusOne Inc (CONE), Digital realty Trust Inc (DLR), Equinix Inc (EQIX), InterXion Holding NV (INXN)

Highlights

The presenter is long shares of InterXion (INXN), which provides carrier- and Cloud-neutral colocation data center services to customers via facilities throughout Europe. With the potential for revenue growth to accelerate to +16% - 18% YoY over the next couple of years, and data center assets being acquired at rich multiples, the risk/ reward and entry point are attractive with the stock trading at ~$66.50 (19.5x this year’s Street EBITDA forecast, and ~14.5x consensus 2020 EBITDA). In response to rising demand, INXN has been building new data centers and expanding existing facilities. Per capex guidance, it looks like demand is favorable across all of the company’s markets, and as volume is added it should flow through to drive upside to revenue and margins (incremental margin is 60%). If the bullish scenario plays out, the Street is underestimating future revenue and EBITDA, and the multiple could improve. Looking out one year, at 20x the presenter’s 2020 EBITDA estimate the implied value for the stock is $88, for 32% upside.

• INXN has 50 data centers across 13 cities in 11 European countries (recent new builds and expansions include Dublin and Marseille, among others; in addition to being a unique asset in Europe, INXN’s facilities are important interconnect points for the North Africa and Middle Eastern markets).

  • The European market is lagging the US market in terms of cloud presence and overall maturity of the data center market (by ~2 - 3 years). Additionally, private capital has not been investing in or chasing these [scarce] assets. Combined, these factors suggest to the presenter that there’s a tailwind for INXN’s growth.

    • In the US, enterprises quickly realized the benefits of outsourcing infrastructure to colocation centers. In Europe, there has not been as much time or money invested in the cloud or interconnects. There has not been as much traffic, so it’s just one cross-connect per cabinet.

• INXN’s equipable space has been expanding for years. Annual growth from 2015 through YTD 2018 has been 8%, 9.5%, 10.5%, and 13%, respectively. Equipped space stood at 122.5k sqm at the end of 2017. In the back half of 2018, the presenter thinks equipable space growth could be 16%, and given expansion plans (22k sqm)/ capex guidance for 2019, it is difficult to envision less than 16% - 17% growth in equipable space.

• Rolling the positive drivers into the presenter’s model results in revenue growth peaking at +18% YoY in 2019. Consensus expectations appear to be conservative, and there could be upside to margins as well (incremental margins are 60%, but the Street is holding margins roughly flat YoY).

Data from recent filed statements, estimates from S&P Capital IQ

• Assuming better than expected revenue growth, INXN’s EBITDA margin could approach 50%. The company has been investing ahead of demand, improving its reach across markets, and should see the benefits near-term.

  • Revenue growth and the margin benefits should moderate in 2021.

• At 20x the presenter’s 2020 EBITDA target, the implied value of the stock is $88, for 32% upside within 12 - 18 months.

• In addition to upside potential based on improving fundamentals and valuation, there is optionality around the potential for M&A activity. The presenter noted a number of recent deals highlighting the strategic value of similar assets, including Equinix outbidding INXN for Telecity, DLR paying 28x EBITDA for Ascenty, and Private Equity interest in other European assets (e.g., KKR acquiring tower assets for a mid-20s multiple to AFFO).

  • While the presenter thinks antitrust issues would prevent Equinix from buying INXN (to appease regulators and close Telecity, EQIX had to divest eight facilities to DLR), he noted that if could be viewed as a strategic asset for any number of other players looking at for exposure to the relatively rapidly growing European market.

    • David Ruberg, INXN’s CEO, is 72 years old. In the presenter’s opinion, he is at the point in his career where a sale of the business would make sense at the right price.

• When asked why the data center business isn’t growing faster given the capex budgets of the major internet companies, the presenter explained how various players are/have been investing ahead of demand. CyrusOne and DLR face some tough comps YoY due to their business mix, and when cloud companies - SaaS or e-commerce players - build their own capacity, they generally “take some racks back”. This is actually potentially positive for retail colocation, said the presenter, as there isn’t more space for the big players. However, they still need to cross-connect and it frees up space for local businesses (Europe to catch up to the US as more businesses shift to the cloud).

  • INXN’s business mix is ~30% cloud, and 70% corporate enterprises.