Digital9 Infrastructure says it delivered an NAV return of 10.4% over 2022. The results statement notes the fall in its share price – blaming market volatility, the mini budget and the walkout of the investment management team in November 2022. The shares went from an 8.1% premium at the start of 2022 to a 21% discount by the end. Yesterday the discount was 22.5%.
Dividends rose from 4.5p to 6p but these were not covered by operating cash (the operating cash dividend cover was just 0.4x). The statement says that this ratio is expected to improve as portfolio investments mature. Within the portfolio, Arqiva’s revenue contracts benefit from inflation protection, with an estimated 65-70% of forecast recurring revenue for the financial year ending 30 June 2023 linked to CPI or RPI. Inflation helps Arqiva’s operational cash flow, however inflation-linked swaps currently in place (until April 2027), offset this. The overall effect in the short-to-medium term is a negative impact on cash flows from Arqiva to the company, which is another factor in the low cash dividend cover.
New manager
Following the initiation of the externally-facilitated recruitment and selection process for the head of digital infrastructure at Triple Point, the board and investment manager have thoroughly evaluated the skills and experience D9 would benefit from and expect to announce the selected candidate in Q2 2023.
Portfolio funding requirement
Total gearing – based on a loan to value ratio – was 25.9% at the year end. At that time, Digital9 had unrestricted cash of £55m and £44m of headroom on its revolving credit facility. £25m of that headroom has been used since the year end, to fund additional capital expenditure at Verne Global London and Aqua Comms.
More money is needed to fund the existing portfolio but the current wide discount stands in the way of share issuance. The statement says that the company and investment manager have evaluated options and commenced processes seeking complementary sources of growth capital to support the growth capital expenditure pipeline of c.£223m for the year ended 31 December 2023. Such complementary sources of growth capital continue to be considered only where they are in the best interests of enhancing shareholder value. This includes:
- a process to syndicate a minority stake in existing investee companies to a strategic capital partner in conjunction with a leading investment bank; and
- investee company level debt: a term sheet has been agreed for a $100m facility to be provided to one of the high growth investee companies. The statement acknowledges that debt financing at investee company level is only appropriate where the incremental return on new investment would significantly exceed the cost of debt. Apart from Arqiva, the investee companies had no financial gearing in place at 31 December 2022.
DGI9 : Digital9 may have a new manager by Q2 2023