Red tape a barrier to entry for foreign data centre operators

A planned $100m NextDC's data centre in Adelaide. Picture: Supplied

It’s not often that red tape is cited as a competitive advantage, but Morgan Stanley reckons the lack of ease of doing business in Australia gives incumbent data centre operators a handy economic moat.

The world has a seemingly insatiable appetite for more data storage and management, with the trend to continue to grow given the strong tailwinds from technologies such as artificial intelligence.

Where there is vast opportunity, global capital will follow, but in a note to clients released on Tuesday, Morgan Stanley says local players such as Goodman Group and NextDC have a distinct home turf advantage.

While major players such as Amazon might increasingly look to using their own data centres rather than renting space from third parties, Morgan Stanley says “we see the Australia data centre owner/operators’ landscape as potentially better placed, as it has some interesting contrasts to other markets’’.

“While current valuations are very high, key local operators have significant, well-established land banks that harbour large value.

“In addition, competing global hyperscalers are finding difficulty with build-outs given the challenge working with local councils, utilities, costs of development approvals et cetera.”

Morgan Stanley says this translates into “compelling opportunities” for the incumbents, and it expects the market to grow at a compound annual growth rate of 13 per cent out to 2030.

For Goodman, Morgan Stanley says the market is currently pricing in a data centre pipeline of $9bn, but it puts that figure at more like $20bn.

“This could translate into material earnings upside for the stock, with Morgan Stanley seeing about 25 per cent upside potential to FY28 consensus earnings per share for each additional $1bn per annum production of turnkey developments,” Morgan Stanley says.

“Goodman also harbours significant optionality in the land bank, where it can sell with approvals or develop the land to client specifications.

“Land that is developed into data centres is valued at a significant premium to that of typical industrial use, providing an attractive return-on-investment option should the company not want to hold the land long-term.”

The broker says NextDC has similar attributes, and says it, “sees upside risk with recent contract wins and international expansion”.

Morgan Stanley is forecasting compound earnings growth of 25 per cent per year for NextDC.

The broker has a price target of $35.65 for Goodman against $34.39 currently and $20 for NextDC against $17.85.