Investing in the “plumbing of the internet” has turned into a painful experience for readers who backed our tip of Digital 9 Infrastructure (DGI9) two years ago. Undaunted, we are switching to its superior rival Cordiant Digital Infrastructure, whose shares have been unfairly hit by the problems at DGI9.
Impressed by the surge in online business and entertainment kick-started by the 2020 pandemic, we recommended DGI9, a portfolio of transmission towers and cable providers, at 112.4p in July 2022.
We watched in dismay as the shares crashed 83pc in response to soaring interest rates, fears about its expensive debts and capital spending, the departure of its original fund managers and the scrapping of its dividend last year.
In March the company sold its best asset, a stake in Verne Global, an Icelandic data centre operator, for nearly £350m to repay short-term borrowing. In the same month, frustrated shareholders voted to wind down the company just three years after its launch at 100p a share by Triple Point Investment Management.
As this column noted in July, when we backed the gradual liquidation of debt fund GCP Asset Backed Income, managed wind-downs can be profitable as distressed investment companies sell holdings and their shares bounce to reflect the released value.
Sadly, this has not been the case with DGI9. Its new board shocked investors this month with a warning of a 43pc write-down in its remaining assets caused by the difficulties that companies, such as Ireland’s Aqua Comms, will face in obtaining financing.
Shares that plunged to 20.6p from a September 2022 high of 116.4p have slid to a new low of 19p, with investors’ hopes of salvaging anything relying on sales processes for some other assets.
The brutal fact is we backed the wrong horse at the wrong time. While acknowledging our error, we would be remiss not to highlight the opportunity in Cordiant.
Launched in February 2021, a month before DGI9, Cordiant is everything its beleaguered competitor is not. Fund manager Steven Marshall, a former boss of American Tower, a $112bn (£85bn) telecoms and broadcast company, wisely invested the £795m raised from investors in its first year.
Avoiding the “racy” prices of up to 25 times earnings that digital platforms were fetching in mainland Europe, Marshall assembled a portfolio of five cash-generative businesses bought on an average of just 10.2 times earnings.
His first foray in eastern and central Europe resulted in a double purchase: CRA, a Czech Republic group that owns towers, broadcast networks and data centres; and Emitel, a Polish operator of radio broadcast services, mobile towers and an internet TV platform.
The performance of these helped Cordiant deliver an underlying 10.6pc return in the year to 31 March, ahead of its 9pc annual target. This continued in the next quarter when the fund’s revenues and profits grew 8.9pc and 14.2pc respectively.
That’s left this year’s dividend target – which was raised 5pc to 4.2p a share – well within reach with the payout covered 1.6 times by earnings after all costs, tax and maintenance spending.
At 81.4p – around 19pc below launch price – the shares yield 5.2pc with Cordiant’s long-term, inflation-linked contracts to mostly blue-chip companies likely to support further growth in capital and income.
Unlike DGI9, Cordiant is not in a financial straitjacket. It has access to £335.4m of cash and borrowings, with 70pc of debt fixed and the first repayment not due until June 2029. Cordiant can use this for further acquisitions, such as the €97.2m (£82.1m) purchase last October of Speed Fibre, a network provider in Ireland.
The rollout of a data centre in Prague and the expansion of digital radio in the Czech Republic and Poland are also high up the agenda, as is buying back Cordiant’s undervalued shares when they offer the best return.
Weighed down by DGI9’s woes and high interest rates, Cordiant shares stand on a huge 32pc discount to their net asset value of 120.1p at 31 March.
Marshall regularly buys Cordiant shares to show conviction that their low valuation is wrong. Last month he scooped up one million at 76.6p to lift his stake to 10.5 million, worth £8.5m. “I can back up the truck and fill it up,” he said.
Questor believes investors should do the same. With the boom in artificial intelligence increasing demand for data, Cordiant is in the right place with a sensible portfolio to take advantage.
Questor says: buy
Ticker: CORD
Closing price : 81.4p
Gavin Lumsden is editor of Citywire’s Investment Trust Insider website
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