For long term investors and followers of our Small Companies Fund (the Fund) you would be aware that one of the themes we have spoken about since the inception of the Fund is Cloud Computing. In recent weeks we have seen the market becoming quite excited about the prospect of Artificial Intelligence (AI) and its related industries. With the news focus being what this emerging technology could mean for company earnings and productivity in general.
We have stated on many occasions that investors in Australian Small Companies have the ability to access all major global growth themes through local businesses operating in these industries here in Australia. When we consider the demand from investors looks to gain access to themes like AI we instantly think of Data Centres which are the physical homes of these technologies.
Our core exposure to this theme is via Macquarie Technology Group (ASX:MAQ), this business has been a day one investment in our Fund, we have always liked this company and believe they are building world classes assets in their Data Centre projects.
Last week MAQ announced that they are completing a capital raising, which we chose to support and add to our existing MAQ holdings. To date one of the limitations to an investment in MAQ is the limited liquidity around trading in it shares. Liquidity is a key criteria for investors when deciding to make an investment, this capital raise to more institutional investors should help grow the liquidity in the shares, and that we consider will likely bring the stock to more investors’ attention.
Aside from increased liquidity the capital raising will also return the company to a Net Cash Balance sheet (excluding lease liabilities). The combination of the cash from the capital raise and what we see as an increased capacity to expand MAQ’s existing debt facility (approximately $190 million), should leave ample flexibility to fund the further growth capex we see to expand capacity at MAQ’s Sydney datacentre site.
Further to the improved balance sheet, MAQ also has significant growth tailwinds in two key services in Platform as a service (PaaS) via a its practice with Microsoft Azure and Infrastructure as a Services (IaaS) via its data centre business.
A recent report from market research firm IDC and commissioned by Microsoft, Public Cloud Paas spend is forecast to grow from $A2 billion in 2022 to $A5.3 billion in calendar year 2026 representing 28 per cent growth p.a. while IaaS is forecast to grow at 13 per cent p.a. over the same period.
Aside from an improved balance sheet and liquidity to fund its growth opportunities, there is a possibility that MAQ may also now qualify for inclusion in the Small Ordinaries Index, which may further support greater investor awareness of the quality of growth opportunity we see in this company.
The Montgomery Small Companies Fund own shares in Macquarie Technology Group. This article was prepared 28 June 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Macquarie Technology Group you should seek financial advice.