BMO's 3 Takeaways From Conversations With Switch Management

Technology infrastructure and data center hosting company Switch Inc SWCH emerged from a "challenging" 2018 but is in a position to sustain EBITDA growth moving forward, according to BMO.

The Analyst

BMO Capital Markets analyst Ari Klein maintains an Outperform rating on Switch with a price target lifted from $15 to $17.

The Thesis

BMO hosted investor meetings with Switch's senior management with three main takeaways, Klein wrote in a note.

• Switch's management emphasized how it stands out against the competition, especially at Tier IV Gold. For example, a contract with Switch includes a telecom cooperative that offers 30 to 50% savings on telecom bills and supports high power densities of 50kw-plus per rack. This results in "unmatched customer stickiness" as evidenced by a very low churn rate of less than 1%.
• Recent momentum includes large contract wins with a top five global cloud provider and FedEx, both of which can expand from the current 5MW agreement. Leasing remains "healthy" across open data centers and management will stand charging for cross-connects which it historically hasn't done for CORE customers. These catalysts support the potential for 10% or more EBITDA growth.
• Capex levels are likely to normalize from as much as $402 million in 2017 to around $260 million. Leverage shouldn't change from its current multiple of 2.3 times which is notably short the industry average of 5.3 times.

Price Action

Shares of Switch were trading higher by 0.25% Tuesday afternoon at $15.82.

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