An “in-line” trading statement from Telecity (LON:TCY) was not enough to persuade Liberum to drop its bearish stance on the data centre operator.
The broker has a bone to pick with Turkey, where Telecity made what Liberum believes is an expensive acquisition.
The acquisition of Sadece, the leading provider of data centre and hosted services in Turkey, added around £30mln of net debt for an additional £2.5mln in underlying earnings (EBITDA).
“The deal establishes Telecity in a new rapidly growing market but is expensive relative to organic expansion,” Liberum says.
As for the group as a whole, the risks remain underappreciated, according to Liberum. Competitors are increasing capacity, the power efficiency of computer services is increasing and there is low price inflation.
“Pricing has already slowed to inflation suggesting the market is no longer under supplied. Competitors are adding significant capacity: Equinix & Interxion are spending more than £400mln of capex in Telecity’s target markets and there are potential new large London sites from Telehouse (23,000 square metres, or m2) and Infinity (14,000m2 Olympic’s media centre),” Liberum’s analysts note.
In addition Telecity's returns are lower than commonly perceived at 10% lease adjusted return on investment capital and there is an ongoing trend to rising net debt which has not led to rising earnings expectations.
“Growth is now being driven by capex (previously price and utilisation) which has not (yet) been reflected in the valuation. Historic EPS growth has been amplified by increased useful economic life assumptions which has resulted in lower depreciation as a proportion of assets,” Liberum believes.
The broker has a ‘sell’ rating on Telecity and a target price of 720p. Shares in Telecity were up 4p at 949.5p in mid-morning trade.