Internet services and emerging markets are two of the most exciting themes for the next decade. So how about combining both by buying shares in Asian data-centre provider CSF Group?
The firm was floated on Aim in March 2010 at 55p in order to help fund expansion outside its heartland in Malaysia, where it enjoys a 35% leadership position. The end-game is to create an interconnected hub of data centres across the entire southeast continent, ranging from Singapore and Vietnam to Thailand and Indonesia. Currently it operates three facilities with a combined 205,000 sq ft of floor space, all located in Malaysia’s equivalent of Silicon Valley, near Kuala Lumpur. The sites are already 100% rented out to numerous clients (eg, Pacific Link Telecom and Masterplan MyCenter) on multi-year contracts. That’s why CSF is in the process of building a fourth site at a cost of around £17.6m.
CSF Group (AIM: CSFG)
This 201,000 sq ft property is being constructed in three phases, with the final stage to complete in 2013 with space being rented out from 2012 onwards. What’s more, 33% of the capacity has been pre-sold, with the government’s telecommunication business being an anchor tenant. Although the firm’s main business is running data centres, it also builds these facilities. Indeed, at the half year, underlying revenues were roughly split 50:50 between these two activities. Going forward, as more customers locate their servers inside its properties, this split should move in favour of hosting and lift margins accordingly.
Given this bullish backdrop, house broker Cenkos is predicting sales and EBITDA of £31.6m and £12.9m for the year ending March 2012, along with a 2.2p dividend. Better still, with an estimated cash pile of £19m, the board has plenty of fire power. I could easily see the group achieving 2013/2014 turnover and EBITDA of £46m and £20m respectively. Using a ten times multiple, discounted back at 12%, that produces an intrinsic worth of 88p per share.
As is often the case with Aim stocks, the risks are high. The company is still relatively small compared to its larger global rivals, so could struggle to reach critical mass. Wholesale bandwidth costs are relatively high in Malaysia, which makes the country less attractive to overseas business. The firm could also be hit by price pressure, foreign-exchange issues, project delays and new technologies. All the same, CSF looks well placed to benefit from the strong fundamentals of soaring internet use, e-commerce, cloud computing and mobility. Preliminary results are due out in July.
Recommendation: SPECULATIVE BUY at 653p