SMALL CAP IDEA: Cordiant Digital Infrastructure

It is widely acknowledged we have had four supercycles in the past 150 years that have seen a massive boom in demand for and prices of commodities.

They have been linked to unprecedented eras of economic growth such as the industrialisation of the US in the late 1800s, or, in the case of the last wave, China’s emergence as a world power in the late 1990s.

According to one City research house, we may be on the cusp of the fifth supercycle. However, the valuable, in-demand commodity this time isn’t iron ore, coal or aluminium.

No, it’s less tangible but equally important in this digital world – the sought-after commodity today is data.

It may sound like hyperbole until you realise there are twice as many mobile phones as there are people – the data-hungry little things.

Even the most anodyne past-times such as watching TV or shopping require some sort of data transfer, handling or storage. And let’s not get onto the subject of connected cities.

Innovations such as the roll-out of 5G technologies and the proliferation of the internet of things will only serve to ramp up demand.

Liberum, the corporate broker and author of the research on the new data super cycle, provides some insight into the ridiculous capital spending this has prompted.

Drawing on its own research and that of McKinsey and JP Morgan, it estimates that US$276billion has been invested globally in data infrastructure such as server farms, fibre optic networks or masts. By 2035, it is expected that figure will have grown to US$600billion.

To put that into context, only spending on the world’s roads and energy plants and transmission grids now exceeds the investment going into data facilities worldwide.

According to Stephen Foss, part of the investment management team for Cordiant Digital Infrastructure, the numbers may already be higher than those touted by Liberum, McKinsey and JP Morgan.

‘I think the sector’s already up to US$550billion a year in capex [capital expenditure],’ says Foss. 

‘It’s growing at about 10 per cent and that’s compounding. So it’s going to be US$600billion in 12 months, and, I think, it will continue to grow at this rate.

‘Data is just such an important part of our society, our personal lives, business and academia. I think growth is going to be constant and consistent for at least 10 years.’

Cordiant Digital, as its full name suggests, invests in digital infrastructure, so you would expect Foss to have done his homework on the long-term fundamentals of the industry.

To date, the fund has acquired assets in the Czech Republic and the US worth just under £370million and it is in the process of completing a third transaction in Poland worth £352million. In fact, it received the long-awaited green light for the Polish deal on Monday (Nov 7).

It’s not a purist, so will acquire mobile towers, fibre optic networks and cloud and data centres rather than concentrate on a particular segment of the data market.

It has a pipeline of further deals worth €3billion, though its value-driven system of screening means the Cordiant Digital team completes fewer than 10 per cent of the transactions it is shown.

The focus is on mid-tier opportunities where competition for assets is less intense making valuations more realistic.

Its strategy is to buy, build and grow. The build and grow part simply means Cordiant Digital will provide the capital and management expertise to improve what it purchases. This in turn should enhance the potential for higher returns at a lower cost of entry.

Practically, value can be added to the existing assets by pushing through inflation-indexed price rises and being smart around utilisation, or by acquiring new tenants or customers.

For investors in Cordiant Digital shares, the proposition is quite simple: The fund provides exposure to the fast-growing backbone of the new digital era.

Not just that, it aims to deliver a total return (dividends plus capital growth) of at least 9 per cent.

In the 12 months to March 31, its net asset value (NAV) total return was 10 per cent, which exceeded expectations set at the company’s IPO in February last year.

The fully covered dividend of 3p last year is slated to rise to 4p for 2022/23.

Looking ahead, the Czech business CRA, and Emitel, the Polish company Cordiant Digital is in the process of acquiring, are tower-focused operations.

As such they lend themselves to emerging opportunities in 5G and the internet of things, according to the Liberum research team. This would allow the group to further enhance the value of its asset base.

The stock, meanwhile, is trading at 84p, at a discount to the infrastructure sector benchmarks.

As such, Liberum thinks the shares are worth 124p each, which is a 48 per cent premium to the current price.

It also believes Cordiant Digital and its London-quoted peer, Digital 9 Infrastructure, have tapped into a sector that has huge, long-term investment potential.

‘The listed digital infrastructure funds provide exposure to the fastest growing infrastructure sector, underpinned by some of the strongest secular drivers of any physical asset class,’ concludes analyst Shonil Chande.

‘The sector supplies the pipes, plumbing and signals, enabling what we view as a supercycle in data that is receiving further impetus from the accelerating roll-out of 5G and the advanced use cases it brings.

‘These include the internet of things’ role in supporting smart cities and new industries like electric cars, increased streaming and reducing the digital divide.’