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An interesting “insight” article from Baillie Gifford highlights the future for cloud computing and data centres. DGI9’s data centre holdings could become even more valuable. And all this data travels through undersea cables.
https://www.scottishmortgage.com/en/uk/individual-investors/insights/ic-article/sm-articles-2023-q2-the-rise-of-cloud-computing-10020406
Arga, what's cooking?
It was a takeover target article which made me look at DGI9. This was covered by broker Peel Hunt, who saw it as having attractive assets: https://www.ii.co.uk/analysis-commentary/eight-investment-trusts-could-be-takeover-targets-ii528755
Reading more, I was concerned to read about Jefferies downgrade of some 6 months ago and the negative view held by The Trots: "am now of the view that (DGI9) perhaps it is best avoided. I perused the 2022 accounts this morning and came away distinctly unsettled."
Piling on the negativity I noted various negatives:
1/ the Investment Manager who left,
2/ the uncovered dividend,
3/ the apparent "black hole" in debt,
4/ the growth discount,
5/ Arqiva inflation-linked swaps and a
6/ dodgy NAV.
I hope to briefly cover these points and why I chose to invest here.
1. There is a new Investment Mgr - as of 13th June '23 - ex Vodafone - that "deflator" is dealt with (and dare I say the replacement looks more credible than the original!)
2. The uncovered dividend. This is purely a timing issue. There are 3 projects which will bring cash flows which will more than cover dividends and costs. From 0.4X to 1.6X comprising Verne Ramp Up, the Subsea Cable commissions H2 2024, and Arqiva growth.
3. The black hole is debt yet this has been refinanced on 5 year terms at fixed rates as of 5th July '23.
4. The growth discount. If people want to risk their money on fixed rate bonds crack on. I am more comfortable sitting on *INFLATION-LINKED* income, with *CAPITAL APPRECIATION*. Neither of these things can occur with bonds. Discount it all you like, but what I know as an investor is that what counts is controlling for the downside risk (infrastructure is a "real" asset with index-linked returns) and what counts is lifetime CASH. And DGI9 seems capable of generating plenty of it from next year - and has enough cash to keep paying dividends until then.
5. Arqiva's swaps have been collared. The gist of this is that there's a limit to how much high inflation can hurt DGI9 over the next 4 years. Bear in mind, too, that falling inflation reduces the negative affect of the swaps in any case. I'm of a mind that inflation could surge again, so the collaring is a positive.
6. Dodgy NAV. Well the syndication of an asset is a great move here and will "prove" the value of the NAV. That's in progress and should finalise in this quarter. A more normal discount rate should be 20% maximum so I see a 6o% upside from here (at 51.4p) just to return to that level.
Therefore the 6 concerns appear to be addressed or at least in hand. Meanwhile the yield is an attractive 12% where there appears to be grounds to think that a 50%-60% growth in dividends is possible (the 1.6X cover) and/or buy backs, or reducing debt.
Given I have zero telecoms and infrastructure this provides some diversification for me too.
GLA
David Stephenson is bullish on DGI9:
"DGI9 post the Aqiva deal has its financial challenges but the core businesses are churning out cash and full dividend cover within the next year or so looks completely achievable. To repeat the point (it hasn't) gone ex-growth and there is every possibility that dividend payouts could increase.
As for valuations... discount rates look fairly sensible and I would repeat another earlier point – most listed businesses in the towerco and data centre space trade at far, far higher valuations. The German listed Vodafone towers business named Vantage Towers – where private equity giant KKR has bought a huge slug of the business – is trading at over 42 times its forecast earnings.
(Source: https://citywire.com/investment-trust-insider/news/david-stevenson-digital-funds-are-too-deep-in-the-dog-house/a2413348?re=107401&refea=1125685)
Nice 5% gain on the week. I've been pondering my investment here and what have I missed? But actually the more I think on it the more I realise this is a high yielding defensive play with strong macro tailwinds and diversified execution risk, along with capacity investments which will steadily fill simply due to simple truths like: "Only 10% of enterprise IT spending has moved to the cloud with $600 billion a year still to move"
Have a good BH w/end all
Agricore; this is our kind of bag. Value, yield. Boringly predictable visible income.
The SP has never recovered from over reaction to costs of funding commitments/debt obligations, seemingly blind to the sustainability of such costs from income. The reavulatuon of it's positives is inevitable.
Damofarl, nice seeing you here. Boring predictable visible income - with some deep value too!