Cordiant Digital Infrastructure (CORD) is looking to capitalise on the surging growth in data consumption and traffic which it claims will provide an economic tailwind for the next decade or more.

By focusing on the mid-market, the investment trust believes it can execute a ‘buy-and-build’ strategy by acquiring assets at a significant discount to the large cap listed companies.

The manager’s thesis is predicated on the discount narrowing as the smaller platforms grow organically through targeted investment and by bolt-on acquisitions, eventually piquing the interest of strategic buyers.

Cordiant Digital is targeting 9% a year growth in net asset value when fully invested. The trust has an ongoing charge of 1.4% and currently trades at an approximate 7% premium to net asset value, about half the premium at which the London-listed infrastructure investment trust sector trades, according to Winterflood data.

Sustainable growth drivers and a progressive dividend policy initially targeting a 3% yield provide an attractive combination for investors looking for growth and income.

SECTOR EXPERTISE

Cordiant Digital invests in data centres, mobile communications and broadcast towers, and fibre optic networks, primarily in the UK, Europe, the US and Canada.

The company sees itself as an attractive acquirer due to the expertise in the asset class and longer-term investment horizon of the investment manager, Cordiant Capital. The latter has decades of investment experience in the digital infrastructure sector and advises on funds worth around $2 billion.

Executive chairman Steve Marshall was previously president of American Towers’ US towers division and pioneered the network neutral telecommunications infrastructure model whereby owners lease infrastructure to multiple operators.

This structural shift means that today around two thirds of mobile towers in the US and Canada are owned by third party independent tower companies.

Co-chief executive and head of investments Ben Mikula was a top ranked analyst in the technology and communications sector whilst working at RBC Capital Markets and has over 30 years of investment experience.

He advised on billions of dollars of capital raising, capital structure optimisation and mergers and acquisitions in the US and Europe. The wider investment team at Cordiant Capital is comprised of 40 investment professionals.

STRUCTURAL GROWTH DRIVERS

Digital infrastructure refers to the critical networks needed to run the internet, ranging from fibre-optics to data centres and towers that wirelessly carry the data traffic to end users.

A key growth driver is the global rollout of the next generation 5G spectrum which will provide greater data transmission, lower latency and enhanced user experience. This is expected to drive demand for and growth of digital infrastructure. It is expected to represent around 20% of global connections by 2026 according to Investec.

Swedish mobile infrastructure company Ericsson recently said there were around 7.9 billion mobile subscriptions which are expected to grow to 8.8 billion by 2026. Smart phones represent around 75% of all mobile subscriptions and penetration is expected to rise to 85% by 2026.

The key factor driving the growth of data centres is the demand for cloud computing and the ‘internet of things’ with the trends likely to endure as more devices become connected and provide real-time access to products and services.

The fibre market is split between long-distance backbone networks and the last mile to the home or business premises.

Cordiant Digital is not involved in assets which require the signing up of customers. Instead, the focus is on housing associations, towns and cities and corporate customers. Greater amounts of data usage and government mandated access to higher speed networks outside of large cities remain strong drivers of growth.

Investec points out that the growth of fibre assets is inextricably linked to the growth of data centres and mobile towers. There is a greater need to invest in backbone density and similarly there is a need to upgrade copper wire connections to fibre as 5G is rolled out.

CREDIBLE ESG CREDENTIALS

Cordiant Digital highlights that it has embedded the principles of environmental, social and governance into its investment model.

For instance, the increase in virtual meetings reduces the pollution generated by driving or using public transport. Employing efficiency measures in the data centres cuts absolute power consumption and developing centres in areas with abundant renewable energy reduces emissions.

QUICK DEPLOYMENT OF CASH

The investment trust has identified a large pipeline of opportunities, valued at over £900 million, an upgrade on its initial estimates when it came to market in February 2021. This implies it could come back to the market to raise more money in time.

A common risk for investors in infrastructure companies is that it can take a long time to deploy the capital that they raise, diluting returns, but Cordiant Digital has been fast in deploying its money.

Following the 4 May purchases of digital platforms in the Czech Republic and Norway for a combined £451 million, undeployed cash sits at around £43 million, representing 12% of net asset value.

These acquisitions will provide the company with a base of stable, cash generative assets with long term contracts as well as attractive opportunities to deploy accretive capital investment.

We believe Cordiant provides investors with exposure to an interesting asset class with attractive growth and income opportunities, and access to an experienced management team.

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