Trading Update

RNS Number : 3548P

Cordiant Digital Infrastructure Ltd

09 February 2023

 

LEI: 213800T8RBBWZQ7FTF84

9 February 2023

CORDIANT DIGITAL INFRASTRUCTURE LIMITED

TRADING UPDATE

Cordiant Digital Infrastructure Limited (the "Company"), an operationally focused investor in the core digital infrastructure that enables modern communications and the internet, today provides an interim update on operating performance, balance sheet, dividend coverage and market outlook following the closing of the acquisition of Emitel in November 2022 and its subsequent integration into the Company's portfolio. The Company continues to implement its "Buy, Build & Grow" strategy whereby it increases the cash flow-generating asset bases of its diversified platform companies, in turn driving the value of these businesses. The Company's annual NAV total return target of 9% comprises capital growth and a progressive dividend which is fully supported by free cash flows generated by its portfolio.

Highlights

· Aggregate portfolio company revenue increased 8.8% to £146 million during the nine months to 31 December 2022 on a like-for-like constant currency pro forma basis[1], demonstrating the overall health of the Company's portfolio companies and the digital infrastructure market more broadly. The Company also notes that, in the majority of cases, contractual inflation adjustments for 2022 are expected to be implemented from the beginning of 2023.

· Aggregate portfolio company EBITDA for the nine months to 31 December 2022 increased to £76.5 million on an adjusted like-for-like constant currency pro forma basis; this represents an increase in EBITDA of 5.9%.  

· The dividend target for the financial year to 31 March 2023 of 4p, confirmed in the Company's interim results in November 2022, is 3.3x covered by EBITDA and 1.4x covered by free cash flow after Company-level costs, net finance costs, taxation and maintenance capital expenditure (collectively "Adjusted Funds from Operations" or "AFFO").

· Significant progress has been made by the portfolio companies on sales initiatives during the nine months to 31 December 2022.

-  Emitel has signed sales orders with a combined value of over PLN 2.6 billion (c.£485 million at current exchange rates): this sum equates to 5x annual revenues.

-  CRA's data centre capacity utilisation (measured in terms of available MW) rose 21.7%, signposting strong demand for the planned 26MW data centre to be built on land owned by CRA and serviced by its fibre.

-  Hudson InterXchange signed two marquee customers : a large US telecoms company and a US TV and satellite operator .

· The Company's aggregate consideration at closing for its three portfolio companies was 10.8x December 2022 EBITDA[2]. This is substantially below both publicly traded comparables in the mobile tower and data centre space as well as the multiples being paid by private capital funds for digital infrastructure assets. The pro forma 30 September 2022 valuations, assuming Emitel was owned by the Company, were 11.1x December 2022 EBITDA. With low entry prices and a thorough approach to calculating and benchmarking discount rates, both the Board and the Investment Manager believe that the Company's NAV enjoys robust underpinning and good prospects for future growth.

· Given the discount at which the Company's shares are currently trading, which is reflected more broadly across the investment trust sector in light of market conditions, the Board has authorised a discretionary programme of share buybacks of up to £20 million subject to the Company's working capital position and applicable legal and regulatory requirements.

· The Company's strategy continues to leverage strong operating expertise provided by its Investment Manager: half of the Investment Manager's 10 Managing Directors held senior roles in the digital infrastructure industry at firms such as American Tower, British Telecom, Crown Castle and Arqiva.

· The Company anticipates holding a Capital Markets Day in London (and via videoconference) for shareholders and analysts in Q2 2023. A separate announcement will be made in due course.

Shonaid Jemmett-Page, Chairman of Cordiant Digital Infrastructure Limited, said:

"The Board continues to be pleased with the progress made by the Company in the two years since its IPO. Both CRA and Emitel continue to perform well operationally and financially, and Hudson InterXchange is well positioned for revenue and earnings growth.  The Investment Manager's strong, hands-on operational capabilities are being deployed effectively at the portfolio platforms."

Steven Marshall and Benn Mikula, Co-Founders and Managing Partners of Cordiant Digital, said:

"In line with the strategy articulated at the time of the IPO, we have been disciplined in searching for high quality, strongly cashflow-generating platforms at attractive prices during a period of time where we saw a lack of price discipline from private capital competitors. These platforms offer both scale and diversification across communications towers, data centres and fibre. We see the opportunity to build a substantially bigger digital infrastructure platform that can deliver a progressive dividend and capital growth over the long term".

Analyst Call

The Investment Manager will host a remote presentation for analysts at 12 PM GMT today. For those wishing to log in to this please contact Ali AlQahtani at Celicourt via [e-mail].

Dividend Policy and Portfolio Construction

The Company's dividend policy is based on the underlying principle that, when the Company is fully invested, the dividend must be covered by free cash flow generated by the portfolio and be sustainable in future periods. The Company targets the maintenance of strong dividend cover and a conservative approach to debt management; in turn, this supports the delivery of strong total returns to investors through its ownership of cash generative digital infrastructure platforms.

For the 12 months to 31 December 2022, the 4p dividend was approximately 3.3x covered by EBITDA and 1.4x by Adjusted Funds from Operations.  AFFO is calculated as normalised EBITDA less net finance costs, tax paid and maintenance capital expenditure. The Company proposes to report AFFO to shareholders as part of its future annual and interim reporting.

The free cash flow generated by the portfolio amply covers the 4p dividend target. The table shows aggregate financial information for the portfolio and the Company for the twelve months to 31 December 2022:

	Twelve months to 31 December 2022* (unaudited) £m
Revenues	197.1
Portfolio company normalised EBITDA	102.4
Company-specific costs	(12.8)
Net finance costs	(19.8)
Net taxation, other	(14.5)
Free cash flow before all capital expenditure **	55.3
Maintenance capital expenditure	(12.0)
Adjusted Funds from Operations ***	43.3
Dividend at 4 pence per share****	(31.0)
Dividend cover	1.4x

* At average 2022 foreign exchange rates

** Aggregate growth capital expenditure of £20.9 million was invested in 2022 across the portfolio

*** Adjusted Funds from Operations comprises normalised EBITDA less Company-specific costs, aggregate net finance costs, taxation payments and maintenance capital expenditure

**** Actual dividend paid in 2022 was 1.5p per share in July and 2p per share in December

The dividend has been increased twice since the IPO in February 2021 and is three years ahead of the dividend target articulated at that time.

From a portfolio construction point of view, the Company has sought to offer investors the benefits of diversification and scale through the acquisition of large, well-diversified digital infrastructure platforms. Both CRA and Emitel have multiple operating divisions and between them they own a portfolio of 1,235 towers, 4,325 kilometres of fibre, six data centres (with a planned major data centre development being progressed), nationwide broadcast networks and national networks of wireless sensors serving utilities. The customer base of these businesses is strongly blue chip.

These platforms offer the ability to build new cash-generating assets and increase capacity utilisation on existing ones. During 2022, £20.9m was invested across the portfolio into growth capital expenditure that included completing the upgrade to the latest generation of digital broadcast technology (DVB-T2) freeing up broadcast capacity; construction and upgrading of telecom tower capacity; and for the feasibility study and preparatory costs for a new data centre in Prague.

The Board believes that this combination of an operationally focused growth strategy together with a prudent approach to portfolio construction and dividend funding has produced a cash generative, conservatively geared and strongly diversified pool of assets. The Company's investments are well positioned to take advantage of both the high margins and reliable cash flows typically generated by digital infrastructure and the significant growth opportunities to be found in this fast-evolving sector. The Company's current pipeline of opportunities predominantly consists of opportunities in Western Europe and the United States.

Discount Control

The Board is disappointed at the discount to NAV at which the Company's shares have been trading, although it notes that many other alternative asset companies have been similarly impacted by market conditions. The Board and the Investment Manager remain confident as to the Company's strategy. The NAV per share was 105.5p at the last reported date of 30 September 2022, after adjusting for the 2p dividend paid in December 2022.  

As previously announced, during 2022 each of the Directors of the Company increased their respective shareholdings. In addition, Steven Marshall, Chairman of Cordiant Digital, acquired an additional 700,000 shares, taking his aggregate holding to 4 million shares, following the release of the interim results in November 2022. The Investment Manager itself, and individuals within it and the portfolio companies, also acquired or added to their personal holdings in the Company, resulting in an aggregate holding of 5.7 million shares.

The Board believes that the NAV of the Company, incorporating valuations of the investments prepared as at 30 September 2022 under the International Private Equity Valuation guidelines and reviewed by a global accounting firm, is robustly prepared and is a fair representation of the value accruing to shareholders.

In consequence, and in consultation with the Company's brokers, the Board has resolved to implement a discretionary programme of share buybacks of up to £20 million. Shares acquired will be either held in treasury by the Company or cancelled. The buyback programme will not be subject to a set cut-off date.

Update on Company Financial Information

As noted above, the Company's portfolio consists of two diversified platform assets and one standalone data centre asset. CRA and Emitel collectively operate across the communications tower, fibreoptic network, data centre, managed services and Internet of Things sensor network segments. Each segment could, if desired, constitute separate operating assets. The New York based interconnect data centre platform, Hudson InterXchange, completes the portfolio. These assets together generated aggregate revenues of £146 million in the nine months to 31 December 2022, an increase of 8.8% on the prior comparable period, on a like for like pro forma, constant currency basis. The EBITDA of the portfolio was £76.5 million for the same period, an increase of 5.9% on a pro forma, constant currency basis. Accretive effects of 2022 inflation are expected to be reflected in the 74% of revenue contracts with full or partial indexation from January 2023 onwards.

The Company's portfolio has aggregate binding growth capital expenditure commitments of c.£4 million as at 31 December 2022. The portfolio companies also have a number of other growth capital expenditure opportunities, which are not binding cash commitments and from which the Investment Manager, in consultation with the underlying management teams of the portfolio companies, is able to select those projects which will be most accretive to shareholder value. This includes the previously identified opportunity to expand the footprint of Hudson InterXchange over the next 3 years.

The Company and its portfolio have cash balances equivalent to £101 million and undrawn Eurobond of £133 million, resulting in £234 million of total potential liquidity. This leaves open the flexibility for the cash generated by the portfolio companies to be invested in growth opportunities in those entities in line with the Company's "Buy, Build & Grow" strategy.

In aggregate, the Company and its portfolio companies had gross debt equivalent to £441 million at 31 December 2022. This resulted in net gearing of 30% as at 31 December 2022, measured as net debt divided by gross asset value. This is a level the Board considers prudent and well below the 50% maximum permitted under the Company's investment policy. This level of gearing is 3.9x EBITDA as at 31 December 2022, including the Company's own costs as a deduction in calculating EBITDA. 78% of all debt at portfolio company level and the Company-level[3] Eurobond is on a fixed interest basis, with the remainder at floating interest; none is inflation-linked.

The Eurobond falls due in the second half of 2026 and there is no earlier clean-down requirement. €50 million of the Eurobond notes have been issued to date (£44 million equivalent) leaving €150 million undrawn (£133 million equivalent). 83% of the interest on the €200 million Eurobond is fixed at rates from 6.0% to 6.3%.

Update on Portfolio Platforms

Emitel

Emitel performed better than expected during the lengthy regulatory approval process which followed the Company's announcement of the acquisition on 5 January 2022, which resulted in an at-close purchase multiple of 9.4x LTM EBITDA. On closing, the Company also recognised a foreign exchange gain of £18 million and cash interest of £9 million, having acquired the Polish zloty required to meet the purchase consideration through a series of forward contracts during 2022.

Emitel earned revenue of PLN416 million for the nine months to 31 December 2022 (unaudited, £76 million equivalent), an 11.5% increase on the prior comparable period driven by strong growth in TV broadcast revenues. EBITDA of PLN277 million (unaudited, £50 million equivalent) for the same period was up 5.6% year on year, reflecting in part the effect of higher energy costs in Poland during the period and the lagging effect of contractual inflation adjustments to revenues.

Cash balances increased to PLN224 million as at 31 December 2022 (£42 million at 31 December 2022 exchange rate). Third party bank debt was PLN1.5 billion (£276 million at 31 December 2022 exchange rate). The interest on the bank debt is 67% hedged until June 2023. The facility falls due in June 2024 and the Investment Manager is working with management on the refinancing plan for this.

During 2022, Emitel completed the planned upgrade of its broadcasting assets to DVB-T2 - the latest generation of digital broadcast technology which broadens its existing service offerings to include enhanced high definition (HD) TV and Internet Media Services such as IPTV, Video on Demand (VOD) and Content Delivery Network (CDN) Services. Further, Emitel can also offer Digital Advertisement Insertion (DAI) to its customers. These strategic investments enable growth potential in the near to medium term and advance Emitel's competitive positioning in broadcast over the long term in a strong market for terrestrial television.

With the DVB-T2 upgrade, Emitel continues to drive broadcast revenue growth and has advanced a number of contract negotiations with the intention to fill additional available capacity in the near future. The Investment Manager's operational experts are working closely alongside Emitel's management to optimise the financial returns from this process.

Emitel's contracted order book has expanded to above PLN2.6 billion with contracts extending as far as 2035 and further contract wins are expected this year. The weighted average contracted revenue backlog is nearly 5x 2022E revenue. This figure excludes contracts which are very likely to renew in the short-term and does not account for the positive impact of future inflation indexation. Several high-profile contracts in the backlog represent an evolution of Emitel's technical capabilities and service offering, such as an 'over the top' video implementation for a major mobile operator for c.140 channels, over 100 of which are HD.

Emitel added 40 new mobile towers (on a pre-contracted basis) to the portfolio. The current tenant ratio per tower rose to 1.4x in 2022.

During the period, a number of non-financial milestones have been achieved. Emitel won the prestigious 2023 Top Employer Poland title. This award to the best employers in the country represents a fourth consecutive victory for Emitel. The company also successfully obtained a certificate confirming compliance by its environmental management system with the PN-EN ISO14001:2015 international standard. The use of green power has also remained an important focus with 100% of Emitel's power usage being from renewable sources. The Investment Manager will seek to implement this model in other parts of the Company's portfolio to improve the portfolio's overall environmental footprint.

CRA

CRA saw revenues for the last nine months to 31 December 2022 increase 5.9% on prior comparable period to CZK1.66 billion (unaudited, £58 million equivalent), and Adjusted EBITDA[4] at CZK0.84 billion (unaudited, £29 million equivalent), an 8.8% increase on the prior comparable period.

Cash balances increased to CZK1.12 billion as at 31 December 2022 (£41 million at 31 December 2022 exchange rate) while third party bank debt remained unchanged at CZK3.9 billion (£143 million at 31 December 2022 exchange rate). The interest on the bank debt is 100% hedged until the second half of 2025 when the loan falls due.

CRA's tower and rooftop portfolio expanded 7% year-on-year to exceed 1,300 in number, of which 50% are towers. Active negotiations in relation to 5G capacity are underway with mobile network operators.

Completion of the roll-out of the latest generation of broadcast technology (DVB-T2) has resulted in a 30% broadcast capacity increase. A new revenue-sharing model has been developed to drive take-up from broadcasters.

The data centre business is growing strongly, with capacity utilisation growing year over year as measured in racks (+14.3%) and power (+21.7%). This has encouraged CRA to advance development of a state-of-the-art data centre located outside Prague with expected market-leading power utilisation efficiency measures and on-site solar power. The land for this facility is owned by CRA, as is the fibre connectivity to Prague's principal interconnect facility. Discussions with potential anchor tenants are underway and the Investment Manager is closely supporting management in developing this business line.

CRA has committed to move to 100% renewable energy over five years and has already achieved a renewable energy use of 46% of total annual energy use.

Hudson InterXchange

The Hudson business is well positioned for growth having invested in its sales and marketing teams. The sales pipeline remains strong with an increase of 68% to 4.4MW of total pipeline between September 2022 and December 2022. Two new customer contracts were entered into in December 2022, with an average contract length of 6 years.

The new heads of sales and marketing are now on board and active in the market. In addition to signing marquee customers such as mobile operator DISH, they have launched a campaign targeted at customers in the financial sector where activities require low-latency interconnection and colocation.  The Investment Manager's operational team is actively engaged with management on converting the substantial pipeline into sales in the coming months.

Hudson has substantial growth capacity, as it is operating at below 30% capacity utilisation. The core and back-end infrastructure is complete for four floors, and Hudson only incurs incremental capital expenditure once a contract for space has been signed with the customer, effectively de-risking the expenditure and linking it directly to revenue contracts.

Pipeline and Market Overview

Having acquired its portfolio platforms at approximately one third of the then prevailing market multiples of EBITDA, and approximately half of current trading multiples of most digital infrastructure companies listed on major stock exchanges, the Board views the Company's portfolio as being well-positioned and attractively-priced. The Investment Manager notes that, greater price discipline is appearing in the private, middle market digital infrastructure sector, although prices in the large deal (£1 billion +) market remain high.

The Company's pipeline of opportunities continues to increase with a number of high-quality opportunities with attractive growth potential in the UK, Western Europe and the United States currently under review. Given its focus on the middle market, the Board and the Investment Manager believe that this is an excellent time to add mid-sized growth platforms to the Company's portfolio.

With the Company's share price trading at a discount to NAV, notwithstanding solid operational performance and growth potential, the Company also continues to explore options for deploying external capital into the portfolio to free up funds for new investment.

The Board re-emphasises its commitment to building value for shareholders through the patient, prudent application of the Investment Manager's strong, hands-on operating and investing experience.

For further information, please visit www.cordiantdigitaltrust.com or contact:

Cordiant Capital, Inc. Investment Manager Stephen Foss, Managing Director	[phone]
Aztec Financial Services (Guernsey) Limited Company Secretary and Administrator Chris Copperwaite / Laura Dunning	[phone]
Investec Bank plc Joint Corporate Broker Tom Skinner (Corporate Broking) Lucy Lewis (Corporate Finance)	[phone]
Jefferies International Limited Joint Corporate Broker Stuart Klein/Gaudi Le Roux	[phone]
Celicourt Public Relations Advisor Philip Dennis/Felicity Winkles/Ali AlQahtani	[phone]

 Disclaimer

This announcement aims to provide an update of developments that have taken place since November 2022 and the resulting financial position of the Company and the Company's platform companies.  The financial position of the Company and the Company's platform companies are subject to a number of risks and uncertainties and could change.  Factors which could cause or contribute to changes include, but are not limited to, general geopolitical, economic and market conditions and specific factors affecting the financial prospects or performance of the Company and the Company's platform companies.

Shareholders should note that the purchase of ordinary shares by the Company is at the absolute discretion of the Directors and is subject to the working capital requirements of the Company and the amount of cash available to the Company to fund such purchases. Accordingly, no expectation or reliance should be placed on the Directors exercising such discretion on any one or more occasions.

This announcement contains forward looking statements, including, without limitation, statements containing the words "believes", "estimates", "anticipates", "expects'", "intends", "may", "might", "will" or "should" or, in each case, their negative or other variations or similar expressions. Such forward looking statements involve unknown risks, uncertainties and other factors which may cause the actual results, financial condition, performance or achievement of the Company and/or the Company's platform companies, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. These forward-looking statements speak only as at the date of this announcement.

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[1] Assuming all portfolio companies were owned by the Company for the nine months to 31 December 2022 and the prior comparable period.

[2] Measured as Enterprise Value upon acquisition divided by unaudited last twelve months to (LTM) December 2022 EBITDA

[3] The Eurobond is issued by Cordiant Digital Holdings Two Limited, a wholly owned subsidiary of the Company.

[4] EBITDA of CRA adjusted to include bad debt provisions for a receivable in place on acquisition, recognised in the nine-month period and prior comparable period being presented; this issue was identified during original due diligence.

 

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