Cordiant Digital reasonably good results at odds with discount

Cordiant Digital Infrastructure’s results to end March 2024 show an improvement in its NAV to 120.1p, contributing to an NAV return for the period of 9.3% (that would have been 11% but for adverse foreign exchange movements), and an increase in the dividend to 4.2p (up 5%), offset by a widening discount – from 28.3% to 46.7%.

The dividend was 4.4x covered by earnings and 1.6x covered by adjusted funds from operations. Aggregate portfolio company EBITDA increased by 7.2% to £139.3m on the back of aggregate revenue up 7.9% to £296.6m.

The company has a £20m buyback programme in place but has used it sparingly. The programme was initiated in February 2023 but just 7.3m shares have been bought back for £5.4m since then. [There is an obvious need to accelerate this].

The managers continue to build the portfolio. Bolt-on acquisitions last year included the purchase of American Tower’s Polish telecom towers business by Emitel, and the acquisition of Cloud4com, a major Czech cloud services provider, and DC Lužice, a data centre located in the ‘Digital Danube’ triangle between Vienna, Brno and Bratislava, by CRA. This has been alongside the acquisition during the year of new businesses in Speed Fibre, a leading fibre network provider in Ireland and Norkring, a provider of broadcast, colocation and site hosting services in Belgium.

Capex spending focused on the delivery of DAB radio networks at CRA and Emitel, continued data centre build-out at CRA and build-to-suit mobile towers at Emitel, together with Speed Fibre’s continued construction of backbone fibre networks in Ireland.

The company had total liquidity equivalent to £167.7m at 31 March 2024, comprising £62.8m held directly, £46.8m held at portfolio company level and undrawn facilities at portfolio company level equal to £59.1m. In aggregate, the company and its portfolio companies had gross debt equivalent to £694.7m at 31 March 2024, and therefore net debt of £585.1m. This works out as gearing 4.5x EBITDA, 38.9% loan to value, or a conventional gearing ratio of 63.6%.

The manager believes that the portfolio, valued at 31 March 2024 at 10.6x historic EBITDA, is undervalued compared to recent transaction multiples. Lower growth mobile tower assets have been valued in other countries at over 18x earnings, and data centre assets at over 20x. While broadcast assets typically attract a lower valuation multiple, the company’s broadcast assets are growing faster than most European mobile tower businesses and have higher escalation rates and a wider customer base.

The manager considers that there is no ‘magic bullet’ to resolve the discount, but that continued strong operational performance, value-creating capital expenditure, acquisition price discipline, significant alignment of interests and continuing the buyback programme should all be recognised when macroeconomic issues affecting equity markets, and especially the investment trust sector, abate.

Since 31 March 2023, the directors, the manager and its staff have made further investments in the shares, acquiring in total 5.0m more shares to bring the combined total to 11.1m shares or 1.5% of the company. This included Steven Marshall, chairman of Cordiant Digital Infrastructure Management, who acquired a further 3.9m shares, bringing his total personal holding to 8.3m shares.

[On the face of it, Cordiant Digital Infrastructure is doing reasonably well. We understand that investors have been traumatised by events at Digital 9 Infrastructure, and we recognise that the company’s gearing level looks high, but the discount seems overdone to us.]

CORD : Cordiant Digital reasonably good results at odds with discount