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Reading this update on our advice to buy a digital infrastructure trust may bring about an uncomfortable feeling of déjà vu among readers because much of what we said about Hipgnosis Songs Fund two weeks ago could also be said of Digital 9 Infrastructure.
We called Hipgnosis a “collection of excellent assets trapped in a poorly managed fund” and unfortunately that description would not be too wide of the mark for Digital 9. Similar too is the trust’s key mistake: borrowing too much in pursuit of those assets.
Hipgnosis tried to cut its debts by selling some of its collection of song rights (it made a mess of the disposal by choosing to sell to a related party, with the result that shareholders blocked it) and Digital 9 is also in the process of selling an asset – one of its most promising, unfortunately. Both funds have suspended dividends to preserve cash.
Let’s look at Digital 9’s assets in a bit more detail. When we tipped the fund in July last year its portfolio largely consisted of data centres and subsea data cables but it had already announced plans to add transmission towers to the fund via the acquisition of almost half of Arqiva, which operates digital television and radio transmitters and smart meter networks in Britain.
Arqiva appears to have been the acquisition too far, because of the increase in debt it brought about, and the trust has struggled to make the numbers work ever since. The scrapping of its second-quarter divi and of its 6p-a-share dividend target for the year, along with agitation for action from some shareholders, led the fund to its decision, announced last week, to investigate a full sale of its holdings in Verne Global. While this will involve the loss of prize assets such as a data centre in Iceland, the trust has said, in effect, that it believes a clean sale of Verne Global to offer the quickest and most effective way to get on top of its debts.
In fact, if it can achieve a price as good as the value at which the assets are valued in its books, which is £473m, it should be able to pay off its borrowings in their entirety. The trust’s market value is only £404m; the fact that this is less than the value of the assets it plans to sell reflects its debts as well as the 56pc discount at which its shares are currently trading relative to the fund’s net asset value.
Will it achieve that £473m price? It never helps when you are seen as a forced seller; on the other hand the trust has already sounded out the market when it sought to “syndicate” its holding in Verne Global, in other words when it tried to sell some of its stake in the asset rather than the entire holding.
In Questor’s view there should be plenty of interest in assets so central to the ever-increasing part that data plays in the lives of individuals and businesses, not least as artificial intelligence promises another step change in usefulness.
Less promising is how the trust may look if it is shorn of its best asset; Arqiva will account for much of the rump and while the mast owner is a solid generator of an income stream it does not offer much scope for growth.
That said, a sale of Verne Global at or close to its book value would not only get rid of the trust’s debt problem but would restore some stability after a troubled period and allow its managers to concentrate once more on getting the best from its assets.
Analysts at JP Morgan Cazenove, the broker, said: “A disposal of Verne Global at NAV [net asset value] could be transformative for Digital 9 but we think there is execution risk and uncertainty about the future of the company.”
We are optimistic that such a worthy asset will achieve a decent price and are certainly not disposed to sell while the shares, as the discount shows, are so shunned. It’s also as well that when we tipped the shares in what was a relatively new fund we advised readers to avoid committing large sums. We’ll hold for recovery.
Questor says: hold
Ticker: DGI9
Share price at close: 46.45p
Investment trust news
In a break with a long-standing taboo, several property trusts have issued new shares at a discount in recent months. In July, Lok’nStore raised £18m at a 16.4pc discount and Unite Students sold £296m in new shares at a discount of 2.5pc. In August, Capital & Regional raised £25m at a 47pc discount and last month Big Yellow raised £110m at a discount of 19.9pc.
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