Jo Groves
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Updated 24 Jul 2024
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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Cordiant Digital Infrastructure. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Long gone are the days when the quest for information required a hopeful trawl through a shelf of leather-bound Encyclopaedia Britannica in lieu of a 10-second search on Google. The Information Age has changed society beyond recognition, with digital technology transforming almost every aspect of our everyday life from remote working to robotic surgery (to name but a few).

Digitalisation has caused an explosion in the volume of global data, which has chalked up a 12-fold increase over the last decade and 90% of which was generated in the last two years alone, according to Statista. And this exponential growth looks set to continue, with Liberum predicting that global data creation will increase by a factor of more than 50 by 2035 relative to pre-pandemic levels.

This data supercycle will require substantial investment in digital infrastructure as the backbone for the transfer and storage of information, including fibre networks, data centres and mobile towers.  The digital infrastructure sector offers investors the opportunity to tap into these structural mega-trends in a technology-agnostic way, while high barriers to entry and long-term, inflation-linked contracts can provide a more defensive angle than mainstream equities.

Powering the supercycle

The digital infrastructure sector enjoys some of the strongest and most persistent secular growth drivers of any physical asset class: it’s the building block of modern economies as well as a tool for reducing socio-economic inequality as governments strive to address marginalisation from inadequate connectivity.

On the consumer side, one of the primary drivers is the increasing number of global internet users, which has risen to around 65% of the population worldwide, according to Statista. While internet penetration rates top 90% in much of North America and Europe, this typically falls to sub-70% for developing countries, driving further growth as populations expand and incomes rise.

There’s also been a significant growth in data consumption, which PwC forecasts will triple from 2022 to 2027, largely driven by demand for video-streaming (which accounts for 80% of data usage). This has been supported by the roll-out of 5G networks which offer higher capacity and faster speeds and are forecast to double from their current level to cover 80% of the world’s population by 2029.

Turning to the corporate side, the transition to cloud computing has also driven demand for digital infrastructure. The International Data Corporation (IDC) forecasts that global spending on public cloud services will hit $1.4 trillion in 2027, a five-year compound annual growth rate of 20%, with providers such as Amazon’s AWS and Microsoft Azure among the beneficiaries. Added to this, global spending on AI-related products and services is forecast to grow at almost 30% per annum in the five years to 2026.

Finally, the Internet of Things (IoT) straddles both consumer and corporate markets, with a wide range of applications for personal devices, home appliances, building automation and smart cities. Fuelled by the transition to clean energy, Statista forecasts a tripling in global expenditure to more than $620 billion by 2030.

Combined on a global scale, these growth drivers will lay the foundation for a significant expansion in the digital infrastructure sector, as shown in the chart below. The data centre market is forecast to enjoy the highest growth, with the likes of Amazon, Alphabet and Microsoft leasing capacity for hyperscale centres as well as the direct provision of server capacity to other businesses.

Strong growth is also forecast in subsea and terrestrial fibre, which transports around 95% of global voice and data traffic including the ‘last mile’ of fibre to homes and businesses. Mobile towers are also expected to benefit from telecoms companies opting to lease, rather than own, their network infrastructure to reduce capital expenditure.

Finding the right angle

As well as strong secular growth drivers, the digital infrastructure sector enjoys high barriers to entry due to high capital expenditure requirements and lengthy development times. These supply constraints enhance profitability, with average EBITDA margins of over 50% for the wireless and tower and sectors, and an impressive 90% for the broadcast sector, according to Liberum.

Digital infrastructure also offers a defensive angle for investors due to the long-term nature of contracts, which often include inflation-linked escalators, and these underpin stable cashflows with a high degree of visibility. Added to this, providers typically enjoy a high quality, blue-chip customer base, including national TV and radio broadcasters, the so-called ‘magnificent seven’ US mega-caps and the public sector.

However, it can be challenging for investors to access this asset class due to the limited number of pure digital infrastructure plays in the UK. One such option is Cordiant Digital Infrastructure (CORD) which aims to capitalise on this high-growth market to generate a total net return of 9% per annum through capital growth and (moderate) dividends.

Cordiant focuses on ‘core plus’ infrastructure with the potential to increase revenue by increasing utilisation and/or capacity through a ‘Buy, Build and Grow’ strategy. The trust is split across three main areas: mobile towers (for TV, radio and telecoms), fibre-optic networks and data centres and cloud computing assets across Europe and North America. Once operational, the assets typically have long contract lives and an attractive, recurring revenue stream.

Cordiant currently owns five companies which are diversified across asset class and geography, serving an impressive roster of blue-chip clients including Virgin Media O2, Amazon, Verizon, AT&T and T-Mobile. This allows the team to execute a strategy of increasing revenue and profitability and, by extension, the value of these assets.  

Two of the largest holdings, České Radiokomunikace (CRA) and Emitel, are market leaders in the Czech Republic and Poland, where linear television and radio remain highly popular, and there is significant potential upside from the roll-out of 5G. In addition, the trust has exposure to the Irish fibre market via Speed Fibre, a US data centre provider in New York and communication towers in Belgium.

The trust is managed by a 17-strong group of digital infrastructure specialists with expertise in buying and operating mid-market companies. This has allowed Cordiant to acquire assets at EV/EBITDA multiples of circa 8-14x, significantly below the historic 20-30x range for single-sector assets above $1 billion, according to Liberum, and this mid-market discount provides the foundation for the trust’s capital growth.

By way of example, the valuation for Emitel has increased by almost 50% (as at 31/03/2024) since its acquisition in late 2022, alongside a 26% uplift in the value of CRA. Valuations are undertaken twice a year by the trust and verified against an independent valuation from a ‘Big Four’ accountancy firm.

Looking at the key valuation drivers, Emitel has delivered a strong operating performance, supported by around 75% of revenue being (partially or fully) inflation-linked. The company also recently signed a new 10-year broadcast contract with Polsat, the most-watched free-to-air TV channel in Poland. In addition, Emitel has pursued a bolt-on acquisition strategy to diversify its asset base, buying 65 telecoms towers from American Tower Corporation (which included long-term contracts with inflation-linked escalators).

As a result, the trust offers investors the potential for equity-like returns with lower operational risk and its focus on capital growth, rather than income, differentiates it from the majority of infrastructure trusts. Cordiant has achieved one and three-year net asset value total returns of 11% and 34% respectively (as at 22/07/2024), placing it in the top two trusts in the AIC Infrastructure sector.

As with other trusts in the sector, Cordiant is currently trading on a discount of more than 35% (as at 22/07/2024) due to weak sentiment towards infrastructure providers in the higher interest rate environment. As base rates start to fall, this could prove an attractive entry point given the pivotal role that the infrastructure sector will play in the digital revolution.

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