SMALL CAP IDEA: Cordiant Digital Infrastructure

It is widely recognized that in the last 150 years we have had four super cycles with massive increases in the demand for and prices of raw materials.

They have been associated with unprecedented eras of economic growth, such as the industrialization of the US in the late 1800s, or, in the case of the latest wave, China’s emergence as a global power in the late 1990s.

According to a city research firm, we may be on the cusp of the fifth supercycle. However, the valuable, in-demand raw material this time is not iron ore, coal or aluminum.

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

It might sound like hyperbole until you realize there are twice as many cell phones as there are people — the data-hungry little things.

Even the most boring activities, such as watching TV or shopping, require some kind of data transfer, processing or storage. And let’s not talk about connected cities.

Innovations such as the rollout of 5G technologies and the spread of the Internet of Things will only increase demand.

Liberum, the corporate broker and author of the study on the new data supercycle, offers some insight into the ridiculous capital expenditures this has caused.

Based on its own research and that of McKinsey and JP Morgan, it estimates that $276 billion has been invested worldwide in data infrastructure such as server farms, fiber networks or masts. By 2035, that figure is expected to grow to $600 billion.

To put that into context, only spending on roads, power plants and transmission networks around the world now exceeds investments in data facilities worldwide.

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

“I think the sector is already up to $550 billion a year in capex” [capital expenditure]’ says Foss.

“It’s growing by about 10 percent and that’s even worse. So in 12 months it will be $600 billion, and I think it will continue to grow at this rate.

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

As the full name suggests, Cordiant Digital invests in digital infrastructure, so you’d expect Foss to have done their 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 £370 million and is in the process of completing a third transaction in Poland worth £352 million. In fact, it got the long-awaited green light for the Polish deal on Monday (November 7).

It is not a purist, so will acquire mobile towers, fiber networks, and cloud and data centers instead of focusing on a particular segment of the data market.

It has a pipeline of further deals worth €3 billion, although its value-based screening system means the Cordiant Digital team completes less than 10 percent of the transactions shown.

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

The strategy is buy, build and grow. The build and growth part simply means that Cordiant Digital will provide the capital and management expertise to improve procurement. This, in turn, should increase the potential for higher returns at lower entry costs.

In practice, value can be added to existing assets by pushing through inflation-indexed price increases and being smart about use, or by acquiring new tenants or customers.

For investors in Cordiant Digital stocks, the proposition is quite simple: the fund offers exposure to the fast-growing backbone of the new digital age.

Not only that, it aims for a total return (dividend plus capital appreciation) of at least 9 percent.

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

The fully covered dividend from 3p last year is expected to rise to 4p in 2022/23.

Looking ahead, the Czech company CRA and Emitel, the Polish company Cordiant Digital are engaged in acquisition, tower-oriented activities.

As such, they lend themselves to new opportunities in 5G and the Internet of Things, according to Liberum’s research team. This would allow the group to further increase the value of its asset base.

The stock, meanwhile, is trading at 84p, discounting infrastructure sector benchmarks.

As such, Liberum thinks the shares are worth 124 pence each, which is a 48 percent premium to its current price.

It also believes that Cordiant Digital and its London-listed peer, Digital 9 Infrastructure, have tapped into an industry with huge long-term investment potential.

Publicly traded digital infrastructure funds offer exposure to the fastest growing infrastructure sector, supported by some of the strongest secular drivers of any physical asset class, analyst Shonil Chande concluded.

“The industry provides the pipes, pipes and signals, enabling what we see as a supercycle in data, further boosted by the accelerated rollout of 5G and the advanced use cases it will bring.

“This includes the role of the Internet of Things in supporting smart cities and new industries such as electric cars, increased streaming and narrowing the digital divide.”