22 June 2023

 

LEI: 213800T8RBBWZQ7FTF84

 

Cordiant Digital Infrastructure Limited

 

Full year results for the year ended 31 March 2023

 

A strong overall performance underpinned by double digit NAV growth and robust dividend cover

 

Cordiant Digital Infrastructure Limited (the Company), the sector-focused specialist owner and operator of Digital Infrastructure that enables modern communications and the internet, is pleased to announce its full year results for the year to 31 March 2023.

 

Financial highlights:

-	NAV per share increased by 10.0%1 or 10.5p on a total return basis to 113.4p
-	Net assets increased to £875.7 million
-	NAV total return since inception of 21.1% (2022: 10.0%), exceeding IPO expectations
-	Gross return from investments in the year2 of 12.3% achieved notwithstanding increase in average discount rate by 81bps during the year
-	Total dividend for the period increased to 4.0p, in line with guidance; 3.4x covered by earnings and 1.5x covered by adjusted funds from operations (AFFO)
-	Acquisition of Emitel completed at effective EV purchase multiple of 8.8x FY22 EBITDA
-	Equity raised at IPO and in subsequent capital raises now fully invested at an average EV/EBITDA multiple of 10.6x
Operational highlights:
-	Continued strong overall performance by portfolio companies which generated aggregate EBITDA growth of 10.0% year on year3 to £104 million
-	Emitel delivered strong performance with revenue up 13% and EBITDA up 8% year on year.
-	CRA is meeting performance expectations and winning new broadcast and telecoms customer contracts.
-	Hudson has won several new contracts and now seeks to convert its substantial pipeline of opportunities.

 

Commenting, Shonaid Jemmett-Page, Chairman of Cordiant Digital Infrastructure Limited, said:

 

"I am pleased to report a strong overall performance by the Company, despite a challenging year for the listed investment trust sector and global markets generally. The Company made a total NAV return for the year of 10.0% and the aggregate pro forma¹ normalised EBITDA of the portfolio companies for the year to 31 March 2023 increased from £94 million to £104 million. Significant milestones were achieved included the completion of the acquisition of Emitel, the Company's largest acquisition to date, as well as substantial strategic progress at CRA and the raising of a €200 million Eurobond facility.

 

"The portfolio we have constructed is high quality with strong potential for growth, with predominantly blue-chip clients, and it is generating strong cash flows through long-term, largely inflation-linked contracts. This, combined with a strong deal pipeline, access to funds and more realistic pricing for mid-market Digital Infrastructure assets, gives us confidence for the coming year and beyond."

 

1.     Based on opening ex-dividend NAV at 1 April 2022 of 104.8p.

2.     Based on investment cost, time-weighted for any follow-on investments made.

3.     On a pro forma, normalised, constant currency basis.

 

For further information, please visit www.cordiantdigitaltrust.com or contact:

 

Cordiant Capital, Inc.	+44 (0) 20 7201 7546
Investment Manager
Stephen Foss, Managing Director
Aztec Financial Services (Guernsey) Limited	+44 (0) 1481 748831
Company Secretary and Administrator
Chris Copperwaite / Laura Dunning
Investec Bank plc	+44 (0) 20 7597 4000
Joint Corporate Broker
Tom Skinner (Corporate Broking)
Lucy Lewis / Denis Flanagan (Corporate Finance)
Jefferies International Limited	+44 (0) 20 7029 8000
Joint Corporate Broker
Stuart Klein / Gaudi Le Roux
Celicourt	+44 (0)20 7770 6424
Financial Communications Advisor
Philip Dennis / Felicity Winkles / Ali AlQahtani

 

Annual report and results webcast for analysts

The 2023 Annual Report will be available to download at cordiantdigitaltrust.com/investors/results-centre/ from 26 June 2023 and will be posted to shareholders on 28 June 2023.

 

The Company will be hosting an analyst meeting at 10.00am BST at the offices of Investec, 30 Gresham Street, London, EC2V 7QN. For those wishing to attend, please contact Ali AlQahtani at Celicourt via [email protected].

 

Notes to editors:

Cordiant Digital Infrastructure Limited primarily invests in the core infrastructure of the digital economy - data centres, fibre-optic networks and telecommunication and broadcast towers in Europe and North America. Further details about the Company can be found on its website at www.cordiantdigitaltrust.com.

 

The Company is a sector-focused specialist owner and operator of Digital Infrastructure listed on the London Stock Exchange under the ticker CORD. In total the Company has successfully raised £795 million in equity, deploying the proceeds into three acquisitions: Emitel; CRA; and Hudson, which offer stable, often index-linked income, and the opportunity for growth, in line with the Company's Buy, Build & Grow model. In June 2022, the Company signed a €200 million Eurobond facility with four European financial institutions, providing fresh committed capital to invest in the existing portfolio and finance new acquisitions.

 

Cordiant Capital Inc. (the Investment Manager), the Company's investment manager, is a sector-specialist investor with particular expertise and experience in Digital Infrastructure. It invests in global infrastructure and real assets, running infrastructure private equity and infrastructure private credit strategies through limited partnership funds and managed accounts. Its current client base consists of global insurance companies, pension plans and family offices.

 

Basis of preparation:

The information below is an extract from the Company's 2023 Annual Report. The 2023 Annual Report will shortly be available for inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism. It can also be obtained from the Administrator or from the Results Centre section of the Company's website, at https://www.cordiantdigitaltrust.com/.

 

Chairman's statement

I am pleased to present the Annual Report for Cordiant Digital Infrastructure Limited (the Company) for the year ended 31 March 2023.

 

Introduction

The Company has achieved a strong overall performance despite a challenging year for the listed investment trust sector and global markets generally. The Company's NAV has increased from £822.3 million to £875.7 million and aggregate pro forma¹ normalised EBITDA of the portfolio companies for the year to 31 March 2023 has increased from £94 million to £104 million. Among the year's significant milestones were: the completion of the acquisition of Emitel, the Company's largest acquisition to date; substantial strategic progress at CRA; and the raising of a €200 million Eurobond facility.

 

Portfolio strategy

The Investment Manager has a Core Plus strategy that aims to generate an annual dividend while also continuing to invest in the asset base of the portfolio companies to drive higher revenues and increase net asset values. The Company is implementing this approach through its Buy, Build & Grow model.

 

We are also a long-term investor with a focus on sustainability. We work with our portfolio companies to improve their ESG performance.

 

The Company began investing during a period of intense corporate activity which saw transaction prices reaching a peak in the Digital Infrastructure market, and consequently sought out high-quality, cash-generating assets that were, in the view of both the Board and the Investment Manager, attractive investment opportunities in that market. As a result of this disciplined approach a portfolio delivering £104 million of EBITDA has been acquired at an EV/EBITDA multiple of approximately 10.6x, based on the most recent reported EBITDA - substantially below comparable acquisitions in the market.

 

The portfolio we have constructed is high quality, with predominantly blue-chip clients and generating strong cash flows through long-term contracts. Hudson is a growth opportunity where the management team is gaining traction, albeit with further work still to do.

 

Our three acquisitions to date give us a broad portfolio diversification by asset type with:

- 1,260 mobile and broadcast towers;

- Seven data centres;

- 4,368km of fibre-optic network;

- Two national broadcast networks; and

- Nationwide networks of active IoT sensors.

 

The Company continues to target investment in our existing portfolio companies and the acquisition of new businesses that reflect the new and more favourable pricing environment, while continuing to seek further diversification both geographically and by asset class across Europe and North America.

 

Funds not earmarked for dividends or future acquisitions are being used to maintain existing assets and to expand revenue potential by building additional capacity in the form of new communications towers, enhanced broadcast capacity and new data centre space.

 

Our strategy remains focused on buying, building and growing our portfolio.

 

Operational performance

The strength of the overall performance of our portfolio companies underpinned the Company's results for the year.

 

The acquisition of Emitel, which we announced in January 2022, closed on 15 November 2022. Emitel exceeded our expectations during the year, with contractual escalators offsetting an increase in energy prices. This better-than-expected performance lowered our effective purchase multiple to 8.8x LTM (last twelve months) EBITDA at close. Alongside this strong financial performance, Emitel completed its upgrade to its broadcast infrastructure for digital terrestrial TV and continues to roll out new products to leave it well positioned for future growth.

 

CRA also performed well during the year. It posted an increase in revenues and EBITDA during the period, partly reflecting continued strong demand for data centre capacity. CRA benefited from upgrading its broadcast network, resulting in a 30% increase in capacity. In addition, it increased by 7% the capacity of its tower and rooftop portfolio, which now consists of 658 towers. Commercial initiatives during the year resulted in entering into contracts for four new broadcast channels during the year or shortly afterwards.

 

Hudson added some marquee customers to its business, including two major US telecommunications carriers. Hudson is a strategically located interconnect data centre which offers a significant opportunity for growth at minimal risk, with further capital expenditure linked to customer acquisition. Our investment in the business during the year has bolstered the sales and marketing teams, which have, in turn, generated an increase in pipeline opportunities.

 

Inflation

The year to 31 March 2023 saw rates of inflation increase across many economies to levels not seen for some years. Overall, the revenue of the Company's portfolio platforms benefited from a high level of inflation protection. This was through a combination of contractual revenue escalators, pass-through costs and active hedging policies, in particular in relation to energy prices. The Investment Manager works closely with the management teams of its portfolio companies to support them in managing their input costs.

 

Approximately three-quarters of portfolio company contracts are multi-year in nature and offer full or partial inflation protection, with the remainder being annual in nature, often renewed automatically, and therefore capable of being repriced to reflect the renewal year's inflation.

1.     Assuming the three portfolio companies were owned for the whole prior-year comparative period, comparison on a constant currency basis and including Emitel's audited 31 December 2022 results.

 

Gearing

In June 2022, the Company raised a €200 million Eurobond facility from a group of blue-chip financial institutions, further bolstering its liquidity position and giving it additional flexibility to invest in the existing portfolio and make further acquisitions. The Eurobond was issued at subsidiary company level and at 31 March 2023, €50 million was drawn down. The balance of €150 million was drawn down during June 2023.

 

As at 31 March 2023, the Company and its subsidiaries had total debt on a look-through basis equivalent to £466 million, representing a conservative net gearing of 30% of gross assets, substantially below the level of 50% permitted under the gearing policy disclosed in the Company's prospectus. A majority of the debt is held at the portfolio platform level on a non-recourse basis, with the remainder being the partial drawdown of the Eurobond facility during the year.

 

Of this gearing, 78% of the Company and its subsidiaries' total debt is on a fixed-interest basis, with the rest at floating rates, none of which is inflation linked. The Investment Manager is actively engaged in a planned refinancing of Emitel's existing debt facilities alongside the company's management team, which is expected to be finalised in Q3 2023.

 

Returns and dividend

In November 2022, the Board declared an interim dividend of 2.0p per share and confirmed the Company's dividend target of 4.0p per share for the year ended 31 March 2023. In line with this guidance, the Company will pay a further interim dividend of 2.0p per share on 21 July 2023. The dividend is well covered by earnings and by adjusted funds from operations (net cash flows from the portfolio businesses) and represents a significant increase over the indicative level set out at the time of the IPO in 2021.

 

This bringing forward of the planned dividend increases reflects the strong cash flows generated by the portfolio.

 

The NAV per share as at 31 March 2023 was 113.4p (as at 31 March 2022: 106.3p), an increase of 6.6% over the year.

 

The increase in NAV reflects the strong overall performance of the underlying portfolio companies and favourable foreign exchange movements, offset by an increase in the discount rates used to value our investments to reflect higher market interest rates.

 

Combined, the NAV total return to investors during the year was 10.0%. The Company continues to target an annual NAV total return of at least 9%.

 

Along with many other companies in the investment trust sector, the Company's shares traded at a discount to NAV during much of the period, largely as a result of macroeconomic factors and dislocations in the market. Both the Board and Investment Manager remain confident in the Company's strategy and the reported NAV. As a consequence, the primary focus has been, and remains, deploying available capital in support of the Company's Buy, Build & Grow model.

 

However, in addition, in February 2023 the Board approved a discretionary programme of share buybacks of up to £20 million, of which £0.9 million had been executed by 31 March 2023. The buyback programme is not subject to a set cut-off date.

 

Principal risks and uncertainties

During the year we updated the principal risks previously identified by the Company. These changes have largely been driven by widely publicised emerging macroeconomic factors such as energy price rises, the impacts of inflation, increases in interest rates and market volatility. For example, while Digital Infrastructure industry revenues tend to benefit from inflation, this is often offset by a delay as contracts are repriced reflecting the prior year's inflationary environment. A number of these factors have adversely impacted the Company's share price as well as those of many other investment trusts listed on the London Stock Exchange, which has in turn restricted the ability of such companies to raise additional equity capital.

 

Sustainability

Both the Board and the Investment Manager continue to focus on sustainability and reducing the impact of the Company and its portfolio companies on our environment. In this regard it is pleasing to highlight progress on a number of initiatives across the portfolio: Emitel's procurement of 85% of its electricity from renewable sources; CRA's progress towards its own target of 100% of its electricity being from renewable sources with an increase to 46%; and Hudson's use of technology to deliver its operations at a better power utilisation efficiency level than others operating in the same location. As part of this focus, this year the Company decided to commence reporting in line with the TCFD recommendations.

 

Board and governance

The Company benefits from a skilled and committed Board combining telecommunications sector, private equity and investment trust experience. That experience allows the Board to provide insight and guidance to the Investment Manager's team in its delivery of value to the Company and its shareholders.

 

The Board views a strong working relationship with the Investment Manager as fundamental to the success of the Company. The Management Engagement Committee considers the performance of the Investment Manager annually, along with that of the Company's other key advisors, and reports to the Board on that performance. The Board has noted that the Investment Manager's strong hands-on operational capabilities are clearly being deployed in support of both pipeline generation and portfolio company operations and that it has further strengthened its experienced team as the portfolio has grown.

 

Outlook

The Company is well placed to see continued progress in the next financial year. The performance of the underlying portfolio companies remains strong overall, and the Company is well placed to benefit further from returns on investments already made and to make new investments in the next financial year. The Investment Manager is actively engaged in applying its operational expertise in each of the portfolio platforms, which the Board sees as a key driver for their future performance. We are also seeing engagement between portfolio companies on best practice and innovation which the Board expects will also contribute to that future performance.

 

In addition to the strong pipeline of organic and acquisition-led investment opportunities, the Company benefits from a relatively strong liquidity position. This leaves it well placed to act on opportunities without the need to raise additional equity.

 

The importance of Digital Infrastructure to the functioning of our economy and our society continues to grow year on year. In turn, this translates to ongoing growth in demand for the sector in which the Company operates. While evolving financial conditions and a complex economic environment will inevitably create challenges, the underlying strength of the Company and the attractiveness of its core markets lead the Board to look forward to the year ahead with confidence.

 

Shonaid Jemmett-Page

Chairman

 

Investment Manager's report

 

Introduction

The Company delivered a strong performance in the year to 31 March 2023 despite continued headwinds throughout the year from rising energy costs and interest rates. NAV per share increased to 113.4p over the course of the year, reflecting positive performance from the Company's portfolio, and the dividend progressed to 4.0p per share for the year, three years ahead of the schedule outlined in the Company's prospectus. The Company's dividend is well covered, both by earnings and on a cash basis. Aggregate debt levels in the Company's financing subsidiary and at the portfolio level are prudent and below industry averages for the Digital Infrastructure sector.

 

Portfolio construction and portfolio strategy

In constructing the portfolio, the Investment Manager has focused on providing investors with exposure to platforms offering scale, growth, cashflows and diversification, through different asset types and geographies, with the aim of protecting and enhancing income streams.

 

At year end, these assets included:

- 1,260 mobile and broadcast towers;

- Seven data centres, including one of the largest interconnect facilities in New York;

- 4,368km of fibre-optic network;

- Two national broadcast networks; and

- Two national networks of active IoT sensors.

 

The Company began investing during a period of very high relative multiples for Digital Infrastructure assets. At the time, the best relative value for a Core Plus strategy lay in seeking high-quality assets that had, in the view of the Investment Manager, been underpriced by the market. CRA and Emitel are both multi-asset platforms that were attracting lower pricing than single asset class enterprises might have attracted. They both operate in attractive markets with strong economic growth and comparatively strong public finances. The Czech Republic and Poland are countries in the core of the European Union, as well as being members of NATO and the OECD. They have many broadly comparable economic statistics to other EU members such as Spain or Portugal.

 

Hudson in New York represented a different opportunity: a strategic asset that was operating at low capacity utilisation, purchased below construction cost.

 

The Company's portfolio has been acquired at prices substantially below those prevailing in both public and private Digital Infrastructure markets. The acquisition multiple of EV/EBITDA for the whole portfolio was 10.6x based on the most recent reported EBITDA for each portfolio company.

 

The Company's Buy, Build & Grow model is designed to be implemented across North America and Europe. Over time, additional capital will be invested in expanding the existing cash flow generating base.

 

Activity in the year

In June 2022, through its financing subsidiary, Cordiant Digital Holdings Two Limited, the Company successfully raised a €200 million Eurobond facility to provide extra capital to deploy in building the Company's portfolio. The Eurobond was oversubscribed and was supported by a group of blue-chip lending institutions. The Company secured attractive pricing, with 82.5% of the interest at fixed rate, and a margin of 4.5% to 4.75%, the rate calibrated to the overall level of gearing.

 

The Eurobond facility has no annual clean-down requirement and is repayable in a single payment in September 2026. In accordance with its terms, €50 million was drawn during the financial year and the remaining unutilised balance of €150 million of the Eurobond facility was drawn by the Company in early June 2023, just before the final date for drawdown.

 

In November 2022, the Company completed the acquisition of Emitel, the Polish Digital Infrastructure platform, its largest investment to date. Completion followed the granting of regulatory approvals by the responsible Polish government bodies. The acquisition was agreed in January 2022 and between the signing of the acquisition and its closing in November 2022, the Company undertook a forward purchasing programme to acquire Polish zloty (PLN), converting £353 million to PLN. This realised a foreign exchange gain of £18 million (reported in Net gain on investments at fair value through profit or loss in the Statement of Comprehensive Income) and bank interest of £9 million (reported as Finance income in the Statement of Comprehensive Income), largely mitigating the cash drag effect on returns of the unanticipated delay in receiving the final regulatory approval. At closing, the purchase price represented an EV/EBITDA multiple of 8.8x FY22 EBITDA.

 

With the acquisition of Emitel, the equity raised at IPO and in subsequent capital raises is now fully invested at an average EV/EBITDA multiple of 10.6x. This contrasts favourably with other transaction multiples in the sector, which frequently reached much higher levels during this period.

 

At Hudson, the investment in sales and marketing made by the Company during the year resulted in the signing of two well-known US telecommunications firms as customers, and an increased level of interest from potential customers.

 

In February 2023 the Company announced that, in light of the discount at which the Company's shares were then trading, and in consultation with the Company's brokers, the Board had approved a discretionary share buyback programme of up to £20 million. Shares acquired under the programme will either be held in treasury by the Company or cancelled. The buyback programme will not be subject to a set cut-off date.

 

To the date of this report, 1.05 million shares had been acquired by the Company at an average price of 90p and held in treasury. The Board and Investment Manager are carefully monitoring market conditions in relation to the buyback programme.

 

During 2023, Board members, partners and employees of the Investment Manager and senior management of the Company's portfolio companies, increased their respective shareholdings in the Company, resulting in an aggregate holding of approximately six million shares. This included Steven Marshall, Chairman of Cordiant Digital, who acquired a further 900,000 shares, bringing his total personal holding to 4.3 million shares.

 

Financial highlights

During the year to 31 March 2023, the Company achieved a NAV total return of 10.0% or 10.5p per share. The NAV per share increased from 106.3p over the year to 113.4p. This is a strong result in a year of high energy prices and market volatility. It reflects a positive operating performance across the portfolio and favourable foreign exchange movements, offset by a meaningful increase in discount rates to reflect increases in market interest rates and higher risk premia.

 

The Company recorded a 58.3% increase in profit in the year to £81.2 million (period to 31 March 2022: £51.3 million). This increase reflects, following the IFRS classification: movement in the fair value of investments of £73.1 million (period to 31 March 2022: £40.3 million); unrealised foreign exchange gains of £6.1 million (period to 31 March 2022: £13.9 million); a realised loss on restructure of £3.9 million (period to 31 March 2022: nil); interest income of £2.7 million (period to 31 March 2022: £2.9 million); net finance income of £9.3 million (period to 31 March 2022: £0.2 million); and net foreign exchange gains of £11.7 million (period to 31 March 2022: £6.2 million) offset by: transaction costs of £6.6 million (period to 31 March 2022: £4.6 million); and other operating costs of £11.3 million (period to 31 March 2022: £7.4 million). The profit of £81.2 million represents earnings per share of 10.5p.

 

The portfolio, whether held directly or through Cordiant Digital Holdings UK Limited, and at 31 March 2023 consisting of Emitel, CRA and Hudson, together with the Eurobond facility, was valued at the reporting date at £872.3 million (31 March 2022: £409.9 million). The Company had cash balances of £10.5 million (31 March 2022: £353.7 million) and net other financial liabilities of £7.1 million (31 March 2022: other net assets of £58.8 million). Net assets were £875.7 million (31 March 2022: £822.3 million), representing a NAV per share of 113.4p (31 March 2022: 106.34p, 104.84p ex-dividend).

 

Application of IFRS

As disclosed in the Company's Interim Report published on 29 November 2022, the Company holds Hudson directly whereas Emitel and CRA are both held through its wholly-owned subsidiary, Cordiant Digital Holdings UK Limited. The Eurobond was issued by Cordiant Digital Holdings Two Limited, which is a wholly-owned subsidiary of Cordiant Digital Holdings UK Limited.

 

Consequently, under the application of IFRS 10 and the classification of the Company as an investment entity, the Company's investment in Cordiant Digital Holdings UK Limited is recorded as a single investment that encompasses underlying exposure to Emitel, CRA and the Eurobond. In order to facilitate shareholders' understanding of the breakdown and performance of the Company's portfolio, the elements of the overall value movement attributable to foreign exchange movements and value movement and income from each portfolio company are identified in Table 3. The Company's profit and NAV under this approach are exactly the same as in the audited IFRS Statement of Comprehensive Income and the Statement of Financial Position.

 

Table 1 shows the reconciliation of Table 3 to the IFRS Statement of Comprehensive Income.

 

Table 1: Reconciliation of Statement of Comprehensive Income to Table 3
	Accrued income	Total unrealised value movement	Net FX movement	Fund expenses	IFRS P&L
Movement in fair value of investments	-	46.0	30.1	(3.0)	73.1
Unrealised foreign exchange gains	-	-	6.1	-	6.1
Realised loss on restructure	-	-	(3.9)	-	(3.9)
Interest income*	2.8	-	-	-	2.8
Investment acquisition costs	-	-	-	(6.6)	(6.6)
Other expenses	-	-	-	(11.3)	(11.3)
Foreign exchange movements on working capital	-	-	11.1	-	11.1
Gain on foreign exchange forwards	-	-	0.6	-	0.6
Finance income	9.7	-	-	-	9.7
Finance expense	-	-	-	(0.4)	(0.4)
	12.5	46.0	44.0	(21.3)	81.2

*subject to rounding

 

Table 2 shows the reconciliation of the closing NAV in Table 3 to the IFRS Statement of Financial Position.

 

Table 2: Underlying components of Statement of Financial Position
	Emitel	CRA	Hudson	Cash	Intercompany balances	Other  assets and liabilities	Eurobond	IFRS Total
Investments at fair value through profit or loss	429.0	389.1	57.0	20.7	20.7	(0.2)	(44.0)	872.3
Receivables	-	-	-	-	-	14.7	-	14.7
Cash and cash equivalents	-	-	-	10.5	-	-	-	10.5
Payables	-	-	-	-	(20.7)	(1.1)	-	(21.8)
	429.0	389.1	57.0	31.2	-	13.4	(44.0)	875.7

Financial performance in the year

Table 3 shows the Company's NAV progression for the year to 31 March 2023, with underlying value growth, foreign exchange movements and costs split out from the audited IFRS classification presented in the Statement of Comprehensive Income and Statement of Financial Position.

 

£m
Opening ex-dividend NAV	810.7
Accrued income	12.5
Value movement	46.0
Foreign exchange movement	44.0
Fund expenses	(21.3)
Net change in share capital	(0.7)
Interim dividend paid in December 2022	(15.5)
Closing NAV as at 31 March 2023	875.7

 

Underlying value growth was £46.0 million in the year (period to 31 March 2022: £40.3 million), comprised of £47.9 million gain in respect of Emitel, £8.2 million gain in respect of CRA (period to 31 March 2022: gain of £40.3 million) and a £10.1 million decrease in respect of Hudson (period to 31 March 2022: £nil gain or loss).

 

Underlying foreign exchange gain for the Company was £44.0 million for the year (period to 31 March 2022: £13.9 million), comprising a £13.2 million gain in respect of Emitel and Polish zloty, £26.6 million gain in respect of CRA and Czech koruna (period to 31 March 2022: gain of £11.5 million), £4.2 million gain in respect of Hudson and the US dollar (period to 31 March 2022: gain of £2.4 million).

 

The Investment Manager and Board have kept the Company's hedging strategy under regular review in light of the volatility in foreign exchange rates since the Company began operations, and given the substantial unrealised foreign exchange gain which the Company recognised at 31 March 2023. To date, the Company has not undertaken any hedging of balance sheet foreign exchange exposure.

 

Total Company costs of £21.3 million for the year reflected: management fees paid to the Investment Manager; costs attributable to the Eurobond facility raised by Cordiant Digital Holdings Two Limited in the year; operating costs and discontinued deal costs of the Company; and acquisition costs relating to the acquisition of Emitel. The ongoing charges ratio for the year to 31 March 2023, calculated as annualised management fee and operating expenses (excluding acquisition costs and non-recurring items) divided by the average NAV during the year, was 1.1%. This has been calculated in line with the guidelines published by the AIC.

 

Table 4 shows the Company's NAV progression from the reported ex-dividend NAV at 30 September 2022 to the audited NAV at 31 March 2023. The increase in NAV in the second half of the year has been driven by a reduction in net debt in the portfolio companies and strong operating performance, somewhat offset by increased discount rates, Eurobond finance costs and other expenses.

 

£m
Opening ex-dividend NAV	816.5
Accrued income	4.8
Value movement	50.0
Foreign exchange movement	18.2
Fund expenses	(12.8)
Net change in share capital	(1.0)
Closing NAV as at 31 March 2023	875.7

 

The gain on foreign exchange translation in the second half of the year relates to the investments in Emitel (£10.0 million), CRA (£15.2 million) and Hudson (loss of £7.0 million).

 

The underlying valuation gain of £50.0 million in the second half of the year is split between Emitel (£47.9 million) and CRA (£7.3 million), with an offsetting value decrease at Hudson (£(5.2) million).

 

Valuations

At Emitel, the value increase during the year to 31 March 2023 was primarily driven by cash flow generation since the acquisition was agreed and the fact that the Company acquired Emitel at a comparatively low multiple to reported EBITDA, with the equity consideration fixed in January 2022.

 

At CRA, the value movement in the year is driven by cash flow generation reducing net debt. This is offset by an increase in the discount rate applied since March 2022 and September 2022.

 

Hudson is in a growth phase as it seeks to take on new customers and build out revenues. During the year, the Company invested a further £4.7 million to support cash flow. At 31 March 2023, the Investment Manager valued the business at £57.0 million, a reduction of £3.5 million from aggregate cost. This was driven by an increase in the discount rate, later than planned ramp-up in revenues and EBITDA, and delays in fitting out the data halls for new customers due to global supply chain issues.

 

The valuations of the portfolio companies were prepared by the Investment Manager according to the IPEV Valuation Guidelines and IFRS 13. The Company has also appointed an independent valuation expert, who performed a full independent valuation prior to the audit.

 

The Company responded to market volatility during the year by increasing the discount rates applicable to its valuations of its portfolio platforms. The increase in overall value reported by the Company therefore reflects generally strong operating performance and robust cash flow generation, partially offset by the mathematical effect of volatile markets, as captured through increases in discount rates. On this basis, the Investment Manager is highly confident that the reported portfolio value is a fair reflection of value that has accrued to shareholders at 31 March 2023.

 

The primary valuation methodology of the Company's three portfolio platforms is a discounted cash flow approach. The Investment Manager has discounted the near-term forecast cash flows of each platform and a terminal value using a weighted average cost of capital (WACC) as the discount rate. This process yields an enterprise value from which the net debt of the platform is deducted to arrive at the equity value attributable to the Company. At 31 March 2023, the Company owned 100% of each platform either directly or indirectly through intermediate holding companies.

 

The WACC for each valuation comprises a weighted average of the cost of equity attributable to the platform and the cost of debt attributed.

 

The cost of equity comprises an appropriate risk-free rate plus a premium for specific risk relating to the platform, its size and its geographical location. Table 5 shows the range of cost of equity and cost of debt used at 31 March 2023 in the audited valuations of the three platforms. The weighted average mid-point cost of equity was 11.0% and the weighted average cost of debt mid-point was 6.5%.

 

	Range low point	Range high point	Weighted average mid point
Cost of equity	9.6%	12.9%	11.0%
Cost of debt	5.0%	7.0%	6.5%
WACC	8.2%	11.0%	9.6%

 

The weighted average discount rate (WACC) used across the portfolio at 31 March 2023 was 9.6%. From 30 September 2022 to 31 March 2023, the weighted average discount rate for the portfolio (CRA and Hudson which were each held by the Company at 30 September 2022) increased by 36 basis points. The weighted average discount rate increase across the whole year for these two investments was 81 basis points. This increase was applied by the Company in response to global market volatility which saw increasing risk free rates and risk premia during the year and which has had the mathematical effect of exerting downward pressure on valuations during the year. Increases in discount rates during the year for CRA and Hudson caused a £78 million reduction in value.

 

Dividend coverage

The Company's prudent approach to portfolio construction has created a cash generative, conservatively geared and strongly diversified pool of assets with scale and the potential for future growth.

 

The Company will pay a further interim dividend of 2.0p per share, bringing the total for the year to 31 March 2023 to 4.0p. This represents a significant increase over the dividend for the year planned at the time of the IPO in February 2021. The 4.0p dividend is approximately 3.4x covered by EBITDA and 1.5x covered by adjusted funds from operations (AFFO) defined as free cash flow after Company level costs, net finance costs, taxation and maintenance capital expenditure. Table 6 shows the calculation of AFFO for the year to 31 March 2023.

 

	Twelve months to 31 March 20231 (unaudited) £m
Portfolio company revenues	200.4
Portfolio company normalised EBITDA	105.0
Dividend coverage, EBITDA basis	3.4x
Net Company-specific costs2	(11.6)
Net finance costs	(18.8)
Net taxation, other	(14.9)
Free cash flow before all capital expenditure3	59.7
Maintenance capital expenditure	(12.9)
Adjusted funds from operations	46.8
Dividend at 4.0p per share	(30.9)
Dividend cover	1.5x

1.     At average foreign exchange rates for the period. Includes Emitel's LTM revenue and EBITDA to 31 March 2023 and FY23 unaudited results for CRA and Hudson, both of which have a 31 March year end.

2.     Fund expenses of £21.3 million net of cash interest received of £9.7 million as shown in Table 1.

3.     Aggregate growth capital expenditure of £14.9 million was invested in the 12 months to 31 March 2023 across the portfolio.

 

Investee company performance

For the year to 31 March 2023, the portfolio companies generated combined revenue of £197.1 million, representing a 7.8% increase over the prior year, on a like-for-like proforma, constant currency basis. Portfolio EBITDA increased 10.0% over the year, on a like-for-like proforma, constant currency basis, to £103.8 million¹.

 

These increases in revenue and EBITDA reflect a number of factors such as new contracts being entered into, including in the broadcasting and telecoms business units, and the selling of additional space at data centres at CRA and Hudson. Higher revenues were earned from existing customers, by the application of inflation indexation and the cross-selling of complementary services. The Investment Manager worked with each of the platform companies to bring its experience in industry best practice to these mid-sized platforms in the areas of broadcast, telecoms infrastructure and data centres. Finally, the platforms made investments in new capacity, technologies and services, such as the DVB-T2 broadcast upgrade and new multiplexers (MUXes), which led to increased revenues and EBITDA.

 

During the year to 31 March 2023, across the portfolio companies £12.9 million was invested in maintenance capital expenditure and £14.9 million in growth capital expenditure. Maintenance capital expenditure included investment in IT systems and security, the backbone network at CRA and infrastructure modernisation at Emitel.

 

Growth capital expenditure included upgrades to the latest generation of digital broadcast technology (DVB-T2) at Emitel, expansion of the number of tower sites, expansion of data centre capacity at CRA and Hudson and continued investment in utility sensor networks. This growth capex was funded by surplus adjusted funds from operations after the payment of the dividend.

 

Total gross debt at the Company, subsidiary and platform level was equivalent to £466 million, and aggregate cash balances at the Company, subsidiary and platform level were equivalent to £122 million. Aggregate net gearing was 30% on a look-through basis, well below the 50% maximum permitted under the Company's investment policy. 78% of all debt is on a fixed-interest basis, with the remainder floating, none of which is inflation linked.

 

At 31 March 2023, the Company had a total potential liquidity position of £254 million, consisting of aggregate cash at the Company and platform level of £122 million and undrawn balances of £132 million within the Eurobond facility, all of which has been drawn subsequent to the year end. As and when appropriate, the Company will continue to deploy cash in internal growth projects at platform companies and in new investments.

 

Digital Infrastructure market outlook

Growth in data traffic continues to accelerate globally due to growing adoption and demand from multiple sectors. This trend is agnostic to any one sector's behaviour because it is fuelled by growing demand from many industry segments.

 

Interconnect data centres act as crossroads for digital data traffic movement and edge data centres bring the digital traffic closer to the end customer. Improved end-user experience and a growing need for data traffic optimisation are resulting in growth in both these markets.

 

Generative AI has the potential to drive a surge in demand for higher capacity data centre space and traffic on fibre networks. In addition, for data centres, increasing use of AI is expected to translate to higher kilowatt requirements from customers and increases in revenues.

 

The Investment Manager also believes that AI is likely to be a positive influence for the broadcast market. Broadcasters can use AI analytics to gain granular insight into their audience faster and more effectively than was the case historically. Better understanding of viewer demographics will come from probabilistic data modelling which will be used for targeting advertising, leading to an improved return on investment for rand owners and higher revenues for the broadcasters. In turn this strengthens the market for TV channels on digital terrestrial TV, which benefits the Company's platforms.

 

It seems likely that AI serves ultimately to enhance the end viewer connections and stickiness for media content companies, either in broadcast or broadband media. The Company, as an owner of Digital Infrastructure, is well positioned to benefit from this evolution.

 

The Investment Manager's team

During the year, the digital team at the Investment Manager was further strengthened with the appointment of Mark Tiner as Chief Financial Officer. Mark brings extensive knowledge and experience, having previously held senior positions within two investment trust managers and as CFO of a €1 billion private equity firm.

 

The Investment Manager also appointed Meekal Hashmi as Chief Operating Officer. His focus on back and mid office and information technology will be of significant value to the digital team. The Investment Manager also expanded its environmental, social and governance team, joining the Partnership for Carbon Accounting Financials and developing Task Force on Climate-related Financial Disclosures (TCFD) capabilities. Additional appointments were made to provide further capability to the transactions, finance and legal teams as the portfolio has grown.

 

Building on the significant strength of the existing digital team reflects the Investment Manager's continued commitment to supporting platform companies in achieving their growth ambitions, along with being able to source and deliver investment opportunities that are in line with target returns.

 

1.     Including Emitel's revenues and EBITDA from audited financial statements to 31 December 2022.

 

Unlike its peers in this market, the digital team at the Investment Manager possesses deep, senior experience of managing and operating world-class Digital Infrastructure businesses. This is combined with private equity executives having decades of experience advising and investing in the sector, making for a unique marriage of capabilities.

 

Outlook

The Investment Manager is pleased with the overall quality of assets and underlying cash flows in the portfolio. These have been assembled at what the Investment Manager believes to be a highly attractive price without sacrificing growth potential.

 

Internally generated cash flows and the proceeds of the Eurobond facility will allow the Company to cover the dividend, engage in appropriate maintenance capital expenditures, expand existing platforms and invest in new assets to further diversify the portfolio, both geographically and by asset type.

 

The Investment Manager remains closely focused on the Company's target of 9% return to shareholders, comprising dividend and capital growth. The pricing environment for digital assets in the middle market has somewhat improved and the Investment Manager has recruited a large and capable team of digital specialists with the skills and experience required to manage the Company's assets and to succeed in maximising total return from Core Plus assets.

 

Based on the solid performance in 2022, which has continued into 2023, the Investment Manager believes the Company remains well placed to deliver as planned in the year ending 31 March 2024.

 

The Investment Manager looks forward to the year ahead with confidence.

 

Emitel

	£m
Original cost1	353.0
Unrealised foreign exchange movement in the year2	13.2
Realised gain on foreign exchange forward	8.6
Income generated in the year3	9.3
Unrealised value movement in the year	47.9
Cash not used in transaction	(3.0)
Value at 31 March 2023	429.0

 

1.     On a cash basis. The Company converted £353 million into PLN between March and June 2022. By the time of the acquisition closing in November 2022, the value of the PLN acquired had increased to over £380 million, reflecting the bank interest earned, and the appreciation of PLN against pounds sterling over the period. £3.0 million of PLN was not utilised for the transaction and was converted back into pounds sterling.

2.     Includes foreign exchange movement recorded in the year on PLN cash.

3.     Bank interest earned on PLN balances held during 2022 between signing of the deal in January 2022 and closing of the deal in November 2022.

 

Financial performance in the year

For Emitel's audited financial year ending 31 December 2022, revenue increased 13% to PLN 548 million (£99.8 million at average exchange rates for the year) and EBITDA increased by 7.7% to PLN 368 million (£67.0 million at average exchange rates for the year). This performance reflected strong growth in TV broadcast revenues, offset by an increase in energy costs and a contractual lag in inflation-adjusted revenues.

 

The increase in broadcast revenues was primarily driven by additional capacity available from investment in the latest DVB-T2 technology - notably, the annualised impact of a new MUX 4 contract signed in 2021, and higher testing revenues prior to commercial launch of MUX 6 (which took place in February 2023). In addition, DVB-T2 technology investment freed up bandwidth for sale, enabling Emitel to offer additional digital services to its broadcast customers and viewers, which further improved the Company's competitive position.

 

Revenue growth was driven by inflation-linked price increases (approximately 75% of Emitel's revenues have full or partial CPI-linked contracts) and incremental telecom infrastructure revenues. 2022 inflation will principally be reflected in indexed revenue contracts from January 2023 onwards. Inflation in Poland for 2022 was 16.6%. Increased telecom infrastructure revenues arose from an additional 40 build-to-suit (BTS) sites and an increase in the tower tenancy ratio to 1.4x, which demonstrated Emitel's success in driving additional revenue from existing infrastructure.

 

Cash balances increased to PLN 224 million (£42 million). The principal amount of third-party bank debt was PLN 1,470 million (£276 million) at year end. Of the interest payable on the third-party bank debt at 31 March 2023, 67% was fixed and 33% floating; none was inflation linked.

 

At acquisition in November 2022, the Company also recognised a foreign exchange gain of £18 million and accumulated cash interest of £9 million, having acquired the Polish zloty required to meet the purchase consideration through a series of forward contracts.

 

Operations

Emitel's contracted orderbook saw further growth in the last financial year and now stands at more than PLN 3 billion (more than £566 million), with contracts extending out as far as 2035. The weighted average contract length in TV broadcasting is seven years, three years in radio broadcasting and 13 years⁴ in telecom infrastructure services.

 

Emitel's incumbent customer base presents an opportunity to evolve its technical capabilities and service offering, including an 'over the top' implementation for a major mobile operator for ca.140 channels, more than 100 of which are HD. Further contract wins are expected during 2023.

 

During 2022, Emitel completed the last stage of digital terrestrial TV frequency switching (refarming), thus completely freeing up the 700MHz band, which is to be allocated to 5G. This was a four-year programme undertaken by the company which moved terrestrial multiplexers from 694-790MHz to 470-694MHz, and in doing so, increased available TV broadcasting capacity.

 

Emitel won the prestigious Top Employer in Poland award again in Q1 2023, reflecting the underlying strength of the business and the high standards to which it is managed and operated on a day-to-day basis. This is the fourth consecutive win for the company.

 

Outlook

Emitel continues to invest in the development of new products such as IPTV, hybrid TV (HbbTV), and DAI platforms which allow among other things, the placement of specific advertisement spots in advertising blocks based on a predefined criterion. The Company recently partnered with the Warsaw Stock Exchange to conduct a pilot for DAI. The pilot will aim to test the functionality and effectiveness of DAI in all types of digital TV platforms in Poland. As part of the project, Emitel is responsible for the installation and configuration of the system, which will be connected to the infrastructure provided by the Warsaw Stock Exchange.

 

Starting in 2020, Emitel began to develop Poland's sixth digital television multiplexer (MUX 6) around the DVB-T2 technology standard to expand capacity and augment its service and distribution offerings for broadcasters. Following the completion and testing of MUX 6 in 2022, in Q1 2023 Emitel was able to secure a new contract win with Polish public broadcaster TVP, for an expansion of its channels' transmissions. TVP is a state media corporation in Poland and is the oldest and largest Polish television network. MUX 6 will be the second digital TV multiplex operated by Emitel exclusively for TVP, the other being MUX 3.

 

4.     13 years for the anchor tenant.

 

The extra broadcast capacity provided by MUX 6 enables TVP to increase the number of channels it offers and allows the media market to use Emitel's existing MUX 1 and MUX 8 capacity for additional new channels in Poland. Both of these developments increase Emitel's revenue potential. The agreement, which came into effect on 1 February 2023, will allow for 96% population coverage in Poland for the MUX 6 channels.

 

After the year end, Emitel acquired 65 telecommunication towers in Poland from American Tower. The towers are less than three years old and come with robust contracts with long tenures (14 years average) with inflation-linked escalators for tenants. These are high-quality lattice towers and have high-quality contracts with blue-chip customers, Orange and Play, who are already clients of Emitel. The acquisition was funded from Emitel's own cash resources.

 

Emitel is working to refinance its third-party bank debt in advance of the June 2024 maturity date. The Company expect this process to be finalised in Q3 2023.

 

Demand for data and Digital Infrastructure in Poland remains strong and was supported by continued growth in GDP during the year. Emitel remains well positioned to benefit from these trends in Poland.

 

CRA

 

	£m
Original cost (May 2021)	305.9
Value at 31 March 2022	351.6
Further investment in the year*	2.7
Unrealised value movement in the year	8.2
Unrealised foreign exchange movement in the year	26.6
Value at 31 March 2023	389.1
Income generated in the year*	2.7

 

* Interest on shareholder loan capitalised during the year

 

Financial performance

Revenues for the 12 months to 31 March 2023 increased by 2.0% to CZK 2.264 billion (£80.3 million at average exchange rates for the year) and adjusted EBITDA increased 16.9% to CZK 1.2 billion (£41.2 million at average exchange rates for the year).

 

The revenue performance was driven by double-digit growth in the data centre (DC), cloud and IoT business lines coupled with single-digit growth in the telecoms business line. This was somewhat offset by a decline in radio broadcasting revenue due to the shutdown of AM broadcasting, as was scheduled for this year. Revenue growth from TV broadcasting was flat year on year. TV broadcasting recently won several new contracts including signing a five-year agreement in March 2023 with blue-chip pay TV broadcaster, AMC Networks International (AMC), a global provider of well-known content such as AMC, Film+ and Sport1. These new contracts, together with inflation linkage in revenues from the broadcast business, position CRA well for broadcast growth in the coming year.

 

EBITDA performance was driven by an increase in revenues, slight improvement in gross margin and a reduction in operating expenditure as a percentage of revenue compared with the year to 31 March 2022.

 

The renewal of existing contracts and the winning of new ones were supported by investments made in the expansion and upgrading of CRA's assets. During the year CRA invested CZK 51 million to build more public protection and disaster relief (PPDR) sites for the Czech government and develop IoT networks in partnership with a number of customers. It also made further investments into the existing tower portfolio to support growing the number of antennas on those towers. These investments directly led to CRA earning extra revenues and EBITDA as a result of the capital deployed. In addition, CRA is benefiting from previous investments made to complete the roll-out of the latest broadcast technology, DVB-T2, resulting in a 30% increase in broadcast capacity that it can offer to customers and potential customers. In the last quarter of the financial year, CRA made good progress in selling broadcast capacity to a number of new entrants into the Czech market, as mentioned above.

 

CRA also saw continued demand for data centre capacity, as measured in racks occupied (+12.2%) and power (+21.4%). This reflects robust demand dynamics from new and existing customers.

 

Cash balances increased to CZK 1.3 billion (£48.1 million) at 31 March 2023. Third-party bank debt remained unchanged at CZK 3.9 billion (£146.0 million). Interest on the bank debt is 100% hedged until the second half of 2025 when the loan falls due.

 

Operations

CRA benefited from stability in its energy costs during the year and incurred lower energy costs compared to many of its competitors due to its hedging policy. This in turn benefited CRA's existing data centre customers who are charged for energy based on a pass-through mechanism. In addition, it helped CRA win some new customers who were facing far higher energy charges by their previous data centre service providers.

 

During the year, CRA also benefited from new senior management appointments. The refreshed management team, working with the Investment Manager's team, has sought to implement innovative commercial arrangements with customers to support and improve the balance of near- and longer-term revenue and earnings visibility. These arrangements include a new revenue-sharing model, to drive take-up of broadcast capacity, and balancing pass-through costs with longer-term contractual agreements.

 

In line with power planning for the new data centre, CRA has committed to 100% of its power requirement coming from renewable sources within the next five years; as at 31 March 2023 46% of the company's electricity use came from renewable sources.

 

Outlook

After the year end, CRA signed a 15-year lease agreement with a leading European mobile network operator. This also resulted in extra space being freed up on CRA's towers despite an increase in revenue per tower.

 

The Czech economy benefited from strong investment activity during the year, and real GDP increased by 2.5% in 2022, according to official data. CRA's business lines benefit from either full inflation protection or fixed escalators which help protect the company's margins. Inflation linked contracts will typically incorporate 2022 inflation, which in the Czech Republic was 15.1%, from January 2023 onwards.

 

Continued demand for data centre capacity is a key driver for CRA's plans to invest in a new 26MW data centre on a former AM radio transmission site outside Prague. The new centre is expected to be a state-of-the-art facility, with market-leading power utilisation efficiency and on-site solar power. The execution for the fibre ring of this data centre has now started. With current plans for the new data centre to be completed in 2025, CRA is also looking at bolt-on acquisition opportunities to boost data centre capacity in the interim.

 

Hudson

 

	£m
Original cost	55.8
Value at 31 March 2022	58.2
Further investment in the year	4.7
Unrealised value movement in the year	(10.1)
Unrealised foreign exchange movement in the year	4.2
Value at 31 March 2023	57.0
Income generated in the year	-

 

Financial performance

During the period, Hudson saw revenue increase by 9.2% to $20.5 million (£17.0 million at average exchange rates for the year) and EBITDA loss increase by 43% to $(5.3) million (loss of £4.4 million at average exchange rates for the year). The increase in EBITDA loss was a result of the recruitment of sales and marketing personnel and the impact of sales commission, which is paid up front when a new contract is starting to generate revenue.

 

Hudson saw solid operational progress through the year, although the pace of new sales has been slower than the Investment Manager had hoped, with Hudson's management also dealing with global supply chain issues affecting the availability and lead times of data hall construction materials. Capacity utilisation of the sixth floor has increased to 321KW resulting from a number of contract wins. These included blue-chip customers such as a major US mobile operator and a leading provider of advance network communications. We expect the pace of pipeline conversion to sales to increase in the coming financial year.

 

The overall sales pipeline has continued to grow and now stands at 7.2MW; the value of sales opportunities which management judge a 50% probability or more increased by 250% between March 2022 and March 2023.

 

Operations

During the year, Hudson benefited from the investment made in its sales and marketing teams, including the appointment of new heads of sales and marketing with extensive recent experience in selling and marketing data centre space and services. The team is now increasingly active in the market, with a campaign to target customers in the financial sector where low-latency interconnection and colocation are required.

 

These initiatives are also being actively supported by the Investment Manager's operational team, with individuals on the ground in New York assisting the management team in converting the substantial pipeline into sales.

 

Outlook

Hudson continues to offer a significant opportunity for growth, with current utilisation below 30%, and no requirement for additional upfront investment, essentially de-risking capital expenditure by linking it directly to revenue contracts.

 

Principal risks and uncertainties

Under the FCA's Disclosure Guidance and Transparency Rules, the Directors are required to identify those material risks to which the Company is exposed and take appropriate steps to mitigate those risks.

 

The Company's assets consist primarily of investments in Digital Infrastructure assets, with a predominant focus on data centres, mobile telecommunications/broadcast towers and fibre-optic network assets. Its principal risks are therefore related to market conditions in the Digital Infrastructure sector in general, but also the particular circumstances of the businesses in which it is invested. The Investment Manager seeks to mitigate these risks through active asset management initiatives and carrying out due diligence work on potential targets before entering into any investments.

 

The Board thoroughly considers the process for identifying, evaluating and managing any significant risks faced by the Company, including emerging risks, on an ongoing basis and these are reported and discussed at Board meetings. The Board ensures that effective controls are in place to mitigate these risks and that a satisfactory compliance regime exists to ensure all applicable local and international laws and regulations are upheld.

 

Every risk that is identified is considered by the Investment Manager and by the Directors, with specialist third party advice where necessary. That assessment is both qualitative and quantitative, considering the nature of the risk and the likelihood of it crystallising, together with the financial, legal and/or operational consequences if it does. For each risk, a two-part score is assigned: low, medium or high likelihood; and low, medium or high impact.

 

The key areas of risk faced by the Company are summarised below:

 

1	The Company may lose investment opportunities if it does not match investment prices, structures and terms offered by competing bidders. Conversely, the Company may experience decreased rates of return and increased risk of loss if it matches investment prices, structures and terms offered by competitors. To mitigate this risk, the Investment Manager operates a prudent and disciplined investment strategy, participating in transaction processes only where it can be competitive without compromising its investment objectives. The Investment Manager has been able to identify and pursue bilateral opportunities rather than auction processes, where competition for these assets has been a less significant factor. However, there can be no guarantee that suitable further bilateral opportunities will arise. In addition, current market volatility and the consequent limitations on the Company's ability to access capital markets may mean that it is not able to pursue certain investment opportunities. Risk: Increased
2	There can be no guarantee or assurance the Company will achieve its investment objectives, which are indicative targets only. Investments may fail to deliver the projected earnings, cash flows and/or capital growth expected at the time of acquisition. To mitigate this risk, the Investment Manager performs a rigorous due diligence process with internal specialists and expert professional advisers in fields relevant to the proposed investment, prior to that investment being executed. The operational performance of our investments to date is in line with our expectations, demonstrating that the due diligence process undertaken at the time of acquisition was appropriately rigorous to mitigate this risk. The same level of rigour must be maintained for future investments. Risk: Unchanged
3	The actual rate of return may be materially lower than the targeted rate of return. To mitigate this risk, the Investment Manager performs a rigorous due diligence process before any investment is made. Post-acquisition, investment valuations are performed by the Investment Manager in line with IPEV guidelines and the Company's valuation policy. The Company has also appointed an independent valuation expert, who provides a reasonableness check of the Investment Manager's valuations at each interim financial reporting date, and performs a full independent valuation at each year end. The Investment Manager also carries out a regular review of the investment environment and benchmarks target and actual returns against the industry and competitors. The NAV total return since inception of 21.1% has grown period on period, supported by investment performance in line with expectations and a dividend programme ahead of IPO target. Volatility in key market indicators over the period has had a negative impact on valuations for investments across the market, and the Company is no exception. Risk: Unchanged
4	The Company may invest in Digital Infrastructure assets which are in construction or construction-ready or otherwise require significant future capital expenditure. Digital Infrastructure assets which have significant capital expenditure requirements may be exposed to cost overruns, construction delay, failure to meet technical requirements or construction defects. The Investment Manager has significant experience of managing construction risks arising from Digital Infrastructure assets and will also engage third parties where appropriate to oversee such construction. The Company's investments to date have not undertaken significant capital construction projects. This risk has therefore been relatively low to date but may increase as capital investment increases under our Buy, Build & Grow model. Risk: Increased
5	The operation, maintenance and performance of Digital Infrastructure assets in which the Company may invest, or acquire in the future, may be affected by the impacts of material geo-political events such as the war in Ukraine, the continuing impact of COVID-19 or another pandemic or epidemic, climate change, or other wide-scale disruption to the global economy and business. Such disruption may materially adversely affect the Company's suppliers, tenants and customers. To mitigate this risk, the Company seeks to acquire a diversified range of investments over the medium term, so that the exposure to conditions in any one market and to individual suppliers, customers and tenants, is limited. The war in Ukraine has had a material impact on the availability and cost of energy and has contributed to a significant increase in inflation in markets around the world. The war itself is not expected to affect the Company's investments directly, but it will have an impact on supply chains in the short to medium term, in respect of both pricing and delivery times. COVID-19 has had limited impact on the Company and indications are that risks from the pandemic are fading. Risk: Decreased
6	Actual results of portfolio investments may vary from the projections, which may have a material adverse effect on NAV. To mitigate this risk, the Investment Manager provides the Board with at least quarterly updates of portfolio investment performance and detail around material variation from budget and forecast returns. The results of our investments to date are materially in line with our projections at the time of their acquisition and their aggregate fair value has increased, contributing to NAV total return of 21.1% since IPO. This demonstrates the quality of the Investment Manager's projections and its ability to manage the investments for growth. Risk: Unchanged
7	The capital markets may remain effectively closed to the Company for a significant period. As a consequence, the Company may be unable to raise new capital and it may therefore be unable to progress investment opportunities. To mitigate this risk, the Company has acquired a portfolio of cash-generating assets with significant organic growth prospects, which together are capable of providing returns meeting the investment objective without further acquisitions. The Investment Manager also continues to consider and, as appropriate, investigate potential alternative sources of capital, including further debt issuance and co-investment. We have an ongoing investor relations programme with shareholders, new investors and research analysts, combined with an active PR process to increase the Company's profile. Significant discounts to NAV are evident in the current share prices of many investment trust companies listed on the London Stock Exchange, including the Company, and have been for a substantial part of the financial year ending 31 March 2023. Investment trusts do not usually seek to raise equity capital at a discount to their NAV and may not do so without shareholder approval. It is not possible to predict when market conditions might improve. Risk: NEW
8	Inflation may cause costs to rise faster than revenues, causing a reduction in margins and profits. The earnings of the Company's portfolio companies have a substantial level of resilience to the effects of inflation. Revenue contracts include full or partial protection from inflation, or cost pass-throughs, and generally comprise long-term contracts with strong counterparties. Energy cost hedging strategies have greatly mitigated the effects on earnings of energy costs that are not pass-through. The Company will seek to put similar protections in place in future contracts and in future investments wherever possible. The Investment Manager will continue to take board positions on investee companies and use its influence to maintain rigorous cost controls. Globally, levels of inflation have risen substantially, largely as a result of the war in Ukraine. While the effect of inflation is net positive in the case of the Company's portfolio, there can be no guarantee that future investments will be able to obtain or maintain similar contractual protections. Risk: Decreased
9	Increasing interest rates cause the cost of existing debt service to rise and increases the cost of new debt. A higher interest rate environment may also reduce the aggregate level of demand in the global economy, and so reduce economic growth. To mitigate this risk, the Company and its investee companies seek to fix or hedge the majority of interest costs of existing debt to mitigate the effect of increases in interest rates. The Investment Manager operates competitive processes with trusted parties to seek best value from lenders to the Company and its investee companies. The Company maintains what it considers to be a prudent level of overall gearing. In response to increasing inflation and volatility in global exchange rates, monetary authorities around the world are increasing the cost of borrowing. This will make new debt more expensive to the Company and its competitors and increase risk around refinancing of existing debt. Risk: Unchanged

 

These principal risks and uncertainties remain the most likely to affect the Company in 2023/24.