Cloud computing is here to stay. It involves the remote storage of applications and data which are accessed remotely via high-speed internet. According to analysts at Bain, this $20bn sector will grow rapidly to nearly $150bn by 2020, driven by demand for software-as-a-service, mobile applications and gaming. This is where CSF comes in. The firm develops (60% of sales) and operates (40%) data centres across southeast Asia.
To date, it has designed, built and fitted out more than 200 such facilities for firms such as BMW and HSBC. It also operates five world-class data centres of its own for tenants that include large telecoms and web search firms. The aim is eventually to create an interconnected hub of sites across the entire sub-continent, ranging from Singapore and China to Thailand and Indonesia.
The immediate priority is to enhance its leading position in Malaysia, a market which is expected to grow at 16% a year over the next five years. That's why the firm raised £28m in March 2010 to construct a new state-of-the-art facility (CX5) in Cyberjaya. This was completed in January. The first section has been contracted out under long-term tenancies (of three to ten years), with the board confident the other two will be fully occupied by March 2014.
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Last year's figures were mixed, with positive momentum in the hosting arm being partly offset by higher start-up costs in a 49% joint venture. Net cash at the end of March was £10.6m, and this should be further bolstered by £14.7m over the next two years from the sale of the ownership (but not the management) of the CX5 building to the Malaysian sovereign fund under a 25-year sale-and-leaseback deal. The idea is for CSF to release capital and recycle the proceeds.
House broker Cenkos is forecasting turnover and EBITDA of £51m and £11.6m respectively for the year ending March 2013, rising to £55.9m and £13.3m 12 months later. I value the group on a ten times EBITDA multiple for the hosting arm, and a six times ratio for the fit-out division. Adding on the cash, the intrinsic worth is about 65p per share.
Since this is a small company focused on Asia, investors need to be relatively thick-skinned. CSF could be squeezed by bigger rivals and then struggle to reach critical mass. Wholesale bandwidth costs are relatively high in Malaysia, making the country less attractive to overseas business. The firm could also be hit by bad debts, foreign-exchange fluctuations, project delays and new technologies. Southeast Asia is prone to seismic activity and extreme weather, which might also damage facilities.
All the same, the firm is well positioned to benefit from soaring internet use and e-commerce. It even offers income-seekers a 4.2% dividend yield, which is unusual for a hi-tech company. Cenkos Securities has a price target of 80p.
Rating: BUY at 44p (market cap £70m)
Paul Hill also writes a share-tipping newsletter, Precision Guided Investments. Seewww.moneyweek.com/PGIor phone 020-7633 3634.
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Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.
Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.
Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.
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