SUNeVision - FY6/24 EBITDA largely in line; improving outlook with dividend upside
- FY6/24 EBITDA rose 10% y/y, largely in line
- Ramp-ups of MEGA IDC (phase 1) and MEGA Gateway, with 30% and 65% confirmed commitments, to support future growth
- FY6/25/26F EBITDA raised 1%/3% on faster customer move-in and higher cross-connect revenue assumptions
- Maintain BUY with revised TP of HKD5.2; stock offers a 19% EBITDA CAGR over FY6/24-26F at a 11x forward EV/EBITDA and 4% dividend yield
Revenue increased 14% y/y to HKD2,674mn in FY6/24. 58% of FY6/24’s incremental revenue was contributed by new sites, with the remaining 42% driven by rental reversion and cross-connect price increment.
By customer segment, revenue from cloud, connectivity, and enterprise customers increased by 15%/5%/20% y/y, respectively, contributing c.43%/40%/17% of total revenue.
Gross profit increased 7% y/y to HKD1,414mn, with gross margin contracting 3.4ppts to 52.9% due to higher depreciation charges and operating costs attributable to initial ramp up of new data centres.
EBITDA increased 10% y/y to HKD1,849mn, largely in line with market expectations of c.13% growth, with margin dropping 2.4ppts to 69.1%. Finance costs surged 102% y/y to HKD220mn due to an increase in borrowing rates.
Net profit was flat y/y at HKD907mn, also in line with market expectations. The company proposed a final DPS of HK11.2cents (same as FY6/24), with payout ratio maintained at 50%.
Outlook
FY6/24 was a challenging year for SUNeVision, with peak CAPEX in a high interest rate environment. Despite this, the company continued to deliver solid growth and maintain a stable dividend payout. Looking ahead, we expect an improved growth profile driven by the ramp-up of new data centres.
Ramp up of news data centres to support future growth
The initial phase of MEGA IDC – a 500k sq. ft. facility located in Tseung Kwan O – commenced operations in 1Q24, and management shared that 60% of the capacity is already being utilised or committed. A major cloud service provider and two bank customers have already moved in, taking up 30% of capacity. The future phases, comprising another 700k sq. ft, are under construction and expected to be in service by end-2026.
Mega Gateway, a 200k sq. ft. facility located in Tsuen Wan, was launched in March 2023, and is now 65% being utilised or committed with a good mix of cloud, telco and bank customers. Management shared that the remaining 35% is specifically reserved for colocation customers with higher connectivity needs, which command higher pricing.
Cross-connect business positive
In addition to incremental growth from new data centre expansions, we are also positive on the company’s cross connect business. The company currently has c.15k cross-connects within their campus. We expect the number to increase, supported by new subsea cables coming to Hong Kong and ramp-up of new data centres. For example, the number of cross-connect in MEGA Gateway doubled in the past six months in aggregate. In addition, the company has started to lift the pricing of cross-connects from March this year, which will support earnings growths given its high margin nature.
Upside on future dividend
The HKD3.8bn shareholder loan has been extended and converted to floating rate from Jan 2025 onwards. The company will benefit from its 100% floating-rate debt structure, taking advantage of the declining interest rate environment.
In terms of dividend, management remains prudent and does not expect an increase in dividend payout ratio in the coming couple of years. Moreover, management is committing a at least stable DPS in FY6/25. Despite that, we expect 10-20% upside on dividend in each of the next three years, driven by (1) the improving growth profile, (2) lowering interest rate environment, and (3) a declining CAPEX trend. Management expects a gradual reduction of 10-20% of CAPEX in the coming years, with completion of construction and fit-out of MEGA Gateway and MEGA IDC Phase 1.
Recommendation and valuation
We lifted our EBITDA forecasts by 1%/3% for FY6/25 and FY6/26 on faster customer move-in assumptions and higher cross-connect revenue. We forecast EBITDA to grow by 21%/17%/13% in FY6/24, FY6/25, and FY6/26, respectively. We also remain positive on the company with strong data centre demand from global and Chinese cloud service providers, as well as financial institutions. The stock is currently trading at an undemanding 11x forward EV/EBITDA and 4% forward dividend yield. Maintain BUY with a higher TP of HKD5.2 (previously HKD4.1), based on a 17x FY25F EV/EBITDA (from previously 15x FY25 EV/EBITDA), c.1SD above its historical average with improving outlook and upside on dividend.
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