Digital 9 Infrastructure Share Discussion Threads

[fisternator] 03/4/2024 20:36

Thank you for taking the time Donald. Was it the Bod that said Macquarie are currently looking to sell their 25% stake?

[bagpuss67] 03/4/2024 16:34

Fair point. Thanks for the post Donald. Did you ask why they they were incurring such heavy and seemingly unnecessary advisor fees?

[loglorry1] 03/4/2024 16:30

I bet Macquarie aren't paying Goldman 8% commission to sell their share!

[wskill] 03/4/2024 16:05

Thanks for that DP will pick up a few more on that update.

[donald pond] 03/4/2024 16:01

It was mentioned that the Macquarie sale might flush out someone willing to buy the whole. The board are open to everything (other that opportunistic bids at very cheap valuations).

[williamcooper104] 03/4/2024 15:57

If MacQ are selling 25% then why don't DGI sell too such that a controlling interest is offered up which is likely to get a premium

[chucko1] 03/4/2024 15:40

DP - great post.

Like a number of other ITs, time is the only cure! In some cases, even that may fail, but those that turn around may do so in a big way.

[donald pond] 03/4/2024 15:31

Well, I just had an hour and a quarter chat with the board, Charlotte, Aaron and Galiena.

They were very open but didn't say anything that I felt was confidential. The upshot of it doesn't really add much to what we already know.

1) The fund was launched as a high yield play. That was, with hindsight, probably a mistake, but at the time of launch wealth managers only wanted yield so that is what the manager provided. But the end product was a mishmash of capital hungry growth stocks and a dividend being paid out of capital.

2) Arqiva was the way to address this and was intended to be the cash cow. Unfortunately, the short term RCF was the problem. I am not entirely convinced about this, as at the time the acquisition was announced, inflation was already running at 9%. On the other hand, I held shares in GCP back then and remember selling them in the 120s in July 2022, so although inflation was running high, yield stocks had yet to collapse. Anyway, they had planned to manage the RCF by issuing shares but that couldn't happen so servicing the RCF became the focus.

3) The Arqiva shareholder loans are not relevant. All shareholders have them: they could be written off and what you would lose on the loans you would gain on the equity. So don't worry about them.

4) The NAV is sound. All of the underlying assets are performing well, though some need more capital if they are to make the most of the opportunities available.

5) Current debt is manageable.

6) There is a strong sense the market doesn't understand Arqiva. Macquarie are currently looking to sell their 25% stake and that might provide more insight to the market.

7) The big shareholders here are the wealth managers. I suggested, and the board didn't disagree, that these are more likely to be selling into strength rather than adding. The board were very frustrated at the lack of market response to the last few items of news, which they thought were very positive. But as with much of the UK market, any strength is being sold into, and most managers would sooner sell the shares for 22p than explain to the clients why they were still holding onto them.

8) They weren't looking for sympathy, but this is clearly something that the board are spending a lot of time on.

9) They didn't say much about the departure of the 2 new directors, but did say that they felt the nature of the underlying assets meant that a self-managed fund wouldn't be popular with many investors. I believe that Brett Miller has been involved in self-managing a couple of debt funds before, but this is a different beast.

10) The main sense was one of frustration. They clearly understand everyone else's frustration too (Aaron mentioned he had bought in at launch, prior to even being appointed to the board). The assets are good, they are performing well, but the market just won't recognise any of this. We discussed how to improve this and it was agreed that communicating better the cashflows coming from the operating businesses and any sales, and how these are ample to service debt and manage investment into the existing portfolio was key. Charlotte kept emphasising that the assets are good and that it would be madness to sell them for less than a fair price.

Overall I was left thinking that the share price is far too cheap. The NAV probably is about right, but the volumes here are so low that all it takes is one or two sellers and the share price is knocked back. There is always the chance that a bidder comes in for the lot.

So, it is far too cheap but I don't know what will be the catalyst for that to change. That's the sum of it.

[invisage] 31/3/2024 11:13

The Oak Bloke’s Substack


Conclusion
Whichever way I look at this the 75% discount is a nonsense. The fact that the share price did not budge on the news of the H2 valuation INCREASE

(NB: the valuation was based on the assets being valued for sale)

…as well as the EBITDA INCREASE announcement, as well as the succesful realisation of Verne and cash INCREASE (debt decrease) speaks to a disconnect on the price.

These assets are plays on the growth of the internet, data and AI. Is the market asleep to the fact that AI and Nvidia are shooting the lights out in its progress and financial performance? In other words these assets are backed with gusting tailwinds.

Hold on to your hat because I believe the market will come to recognise this and suddenly DGI9 will not be 75% off.

hxxps://theoakbloke.substack.com/p/dgi9-fy23-update-c54?utm_source=post-email-title&publication_id=1859293&post_id=143084212&utm_campaign=email-post-title&isFreemail=true&r=l7p3m&triedRedirect=true&utm_medium=email

[williamcooper104] 30/3/2024 15:04

Fees now should be a v low fixed fee and a reasonably generous transaction fee

[donald pond] 30/3/2024 14:54

In my experience the valuation process is run by the manager with the valuation agent and then presented to the board. It is clear that nobody believes the current NAV and the assets will be sold for what can be achieved. The only purpose of the NAV at this stage is to determine the level of fees payable to the manager. Which is a terrible conflict of interest

[loglorry1] 30/3/2024 14:11

GHH why does the BoD care if the NAV reflects what the assets are eventually sold for or not? It's a different thing arrived at using a different methodology.

There's no downside for them putting out what they have put out and then getting on with selling the assets.

Whoever buys it knows what it's worth to them and bids accordingly.

Presumably when the data rooms are open buyers can decide if they believe the growth models or not. If they do we'll get something close to NAV. If not we will get closer to the share price.

My Ave is 26p ans so I hope not lose too much from here. Might even make a profit.

[ghhghh] 30/3/2024 12:20

Donald

I think the reason to value high is because the manager runs the relationship with the valuation agent and the manager gets paid a percentage of the NAV. So they have an incentive to keep the valuation up.

But it defies belief that all these advisors aren't in contact with the BoD, discussing possible realisable valuations. Ditto the other stakeholders in subsidiary companies.

Valour may be a bit flakey but she is clearly not dodgy! I do no believe she, nor the two non execs, would be party to misrepresenting the NAV. Le Cornu now Chair of Valuation Committee and he looks okay?

I suppose the two questions are:

What valuation would another trust, paying paper, put on these assets?

What's the realisable value for hard cash?

The end result could be mix of the two.

Do you know how Miller and Boleat rated the assets?

Thanks

[genista71] 30/3/2024 09:24

Donald pond is spot on on both counts

[donald pond] 30/3/2024 09:20

Ghh I think the reason to value high is because the manager runs the relationship with the valuation agent and the manager gets paid a percentage of the NAV. So they have an incentive to keep the valuation up. I'm told that the 2 directors who stepped down did so in frustration at the appointment of Liberum. They did not think paying fees to a fourth investment bank was a wise use of funds. But in return for a fat fee Liberum put out a 96p target price which nobody believes.

[donald pond] 30/3/2024 09:14

Rambutan,I've had multiple direct contacts over advfn and LinkedIn from people who have worked with the Chair and they all say she is hopeless and out of her depth. I know her personally but not professionally.

[rambutan2] 29/3/2024 20:30

Well, the chair holds a lot of sway, and didn't make a good impression on me in that recent update/webcast, so i googled her. Actually, sounds as though she's quite a formidable character and a stickler for corporate governance. Plenty of relevant experience you would have thought. But perhaps playing by the City book is not the best way to get the highest returns for shareholders? Or perhaps it is?

[ghhghh] 29/3/2024 16:31

I'm still struggling to accept that the assets are grossly overvalued.

Nowadays we live in a binary world where you are either a hero or zero. The D9 team are tarred as zeros, a bunch of deceiving incompetents. However the reality is more nuanced.

My guess is that the valuations are fair and accurate in comparison to the same valuation techniques used by many other infrastructures funds. The BoD may be hoping to attract a paper bid from such a Trust, perhaps after a tidy up partial clear out.

The other reason for not pricing to anticipated sale price is the classic start high and get beaten down to a mutually acceptable price.

Advisors and other stakeholders (in portfolio companies) will curb excessively unrealistic valuations.

And beggars belief that the BoD would grossly inflate valuations when they are seeking to sell! What's the point?

Much depends on the Argiva exit strategy, presumably in agreement with other Argiva stakeholders. Would this then open the door to selling Argiva within D9 and an early payback for D9 shareholders?

[steve36] 29/3/2024 14:42

Certainly raises some questions but - I believe that Aqua Comms was valued in the 2023 interims at £227m plus £26m for EMIC-1 ie £253m combined. The error was in the portfolio review on page 31 of the interims which is headed "Aqua Comms (including EMIC-1" but the stated closing value is only for Aqua Comms. So, an error in the detail but not in the actual accounts. Poor but not as bad as made out.

Secondly, the EBITDA for Aqua Comms was given as £8.5m for 2023 per the update on 28th Feb. The valuation at 31 Dec 23 is £238m, ie a multiple of 28x. Very high but not as high as made out. In the same update, EBITDA for the Verne companies totalled £17.2m for 2023. The sale price was £345m (before costs), which is a multiple of 20x EBITDA plus potentially another £106m, which if received would be a multiple of 26x 2023 EBITDA. So, 28x perhaps not completely ludicrous for a business which grew its capacity by 50% from Aug 23.

[bagpuss67] 29/3/2024 13:31

Is there no end to the incompetence. Embarrassing.

[invisage] 29/3/2024 10:50

Stifel downgrades Digital 9 Infrastructure after casting doubt on valuations

Stifel has downgraded Digital 9 Infrastructure from ‘positive̵7; to ‘negative̵7; due to what the broker said appears to be “materially incorrect” valuations, as well as a loss of confidence in the board’s decision-making process.

In a stock exchange notice today (28 March), DGI9 said the valuation of the portfolio as at 31 December was £1.08bn, which represents a 5.6% decline since 30 June 2023.

The decline principally relates to a 16% fall in the value of Verne Global, which has been valued at £398.3m, including gross proceeds already received and deferred consideration due to be received from its sale to Ardian, as well as a possible earnout.

Excluding Verne, the portfolio was valued at £684.1m, up 1.6% since 30 June and down 1.2% since the end of 2022.

Based on the £1.082bn portfolio fair value, the board also released an unaudited NAV of 84p per share (£728m) as at 31 December 2023, which represents a 16% decrease, or £138m, in the second half of 2023.

In a research note published this morning, Stifel analyst Sachin Saggar said an additional asset appears to have been created in EMIC -1, with a valuation of £36m. In the interim results to 30 June 2023, Aqua Comms including EMIC-1 was valued at £227m, he noted.


"This figure based on today's RNS is now £253m as at 30/06/23. Hence, either the interims or RNS are inaccurate. We think it is damning for a board that presided over so much chaos and value destruction," he said.

"We have had confirmation that figures in today's RNS are accurate, but the interim figures were incorrect. In our view, this is a bad look for a portfolio where there are less than 10 assets."

Saggar also said it is "inconceivable" that the portfolio excluding Verne Global has not been materially written down.

"On the surface, it appears as if Aqua Comms is being valued at an EBITDA multiple of c.48x. This is a sector which traditionally does not trade at a multiple of greater than 10x," he said.

"The multiples should be taken with a pinch of salt given costs incurred during ramp up of new cables – but the discrepancy is far too significant and just looks incorrect.

The analyst also drew comparisons to fellow investment trust Hipgnosis Songs. "Overall, the NAV appears to have been prepared based solely on a DCF without any practical sense check against transaction multiples. This is along the lines of what we have seen at Hipgnosis," he added.


hxxps://www.investmentweek.co.uk/news/4191067/stifel-downgrades-digital-infrastructure-materially-inaccurate-valuation

[skinnypope] 28/3/2024 16:26

@keith95 - the VLN very much is ON the balance sheet of D9, it was issued by one of D9s subsidiaries.

The NAV for Arqiva has always been the fair value of the investment netted with the value of the VLN.

While the VLN is often spoken of as "non-recourse", I find this to be mostly semantics as the holder of the note (CPP) have a charge against D9 for the amount of the VLN. In other words, the loan is "non-recourse" in the traditional sense, as the lender does not have recourse to the general assets of D9 plc, but they do have recourse to one specific asset held in one of the subs.

When D9 bought Arqiva back in 2022 for £300m cash + £159m VLN = £459m total enterprise value, they immediately revalued their investment up by £55m in the year end accounts. I think they have largely held that valuation steady and then the NAV has just come steadily lower as the VLN has accreted.

So current NAV = £459m [original EV] + £55m [2022 FV uplift] - £175m [VLN grossed up]

This is £339m versus the NAV today at £340m so I'm happy with the numbers.