At this point, some readers may think I have disappeared down an 'analysis rabbit hole', desperate to justify my belief that CDC is losing $12.6m per year, when the implied published actual equivalent figure as derived from the annual report shows a CDC profit of $97.4m for the year. So I have obviously 'lost it'. But actually I believe both figures can be correct, even if they are not obviously reconcilable. Let me explain.
There are different ways to measure profit. In the case of CDC, as far as Infratil is concerned, their interest in CDC is a minority owned equity stake. Also CDC is not listed. So CDC does not have an independently determined 'market value' which Infratil can 'mark to market'. But according to p26 of the capital raising document.
https://infratil.com/news/infratil-a...-equity-raise/
The value of CDC has risen by: $4,419.7m - $3,678.7m = $741m (the value of Infratil's gain being 0.4824 x $741m = $357m)
So if the gain in value at CDC of $741m, was not an underlying value change as determined by 'Mr Market', where did the gain come from? Look in the very small print at the bottom of p6 in the presentation and you will find the answer.
"2. Infratil Portfolio asset value represents the independent valuation of Infratil’s equity ownership or book value of its portfolio companies."
This is how I read that statement. Infratil hired some clever company valuation boffins, appointed them as consultants for CDC, and laid out the future forecast cashflows of CDC: Not only the 302MW of current datacentre capacity but also the 388MW under construction across the current footprint, and the 400kW of advance capacity expected to come on line in the next 4-5 years and the acceleration of the Marsden Park campus project in Sydney. Thus the 'value' of CDC is not derived solely from the profitability of the cashflow from the existing 302MW of data centres. That is merely one ingredient. Subsuming that cashflow will be the cashflow from the additional 1,870MW - 302MW = 1,568MW of data centre power that is planned to come on line. Of course being 'future capacity', the present day value of this expansion will be discounted back in present day valuation terms. But it still represents a large jump in modelled cashflows, compared to what would have been modelled if only the future cashflows of datacentres already built, and clients already signed, were used.
The way I look at it, CDC have already eaten their own future when they claim an increase in value of $741m over the year. Some of this embedded future value is from data centres not built and clients not signed. But current market signals are such that where the new data centres are built, clients will be clamouring to sign up. So these gains are not yet real in cashflow terms. They are just based on expectations of where the valuation boffins expect cashflows to go.
Infratil shareholders will not find these matters discussed like I have just done here in the annual report. That is because CDC is a private company, and Infratil shareholders are treated as 'CDC outsiders', only fed the information CDC sees fit to hand out to them. One of those information tidbits is the $741m gain in CDCs valuation over the year - a nice positive piece of headline information, which sounds fantastic. But I wonder how many Infratil shareholders have cottoned onto the fact that ten years of growth are likely already incorporated into that valuation change? Don't get me wrong, I am not suggesting the valuation boffins are idiots, or wrong. If the business plan pans out, that $741m increase in value will become real. But right now I would suggest that $741m incremental increase in value is not real, it is merely a 'well researched promise'.
In summary, the profitability of CDC in its 'state of the present' in 2024 is very different to the discounted future cashflow valuation when the full cashflow picture has been laid out over ten years or more. A discounted cashflow model change can be capitalised into a 'lump sum gain'. And I believe this is what has occurred over FY2024. If an equity investment in which Infratil owns a minority stake increases by $741m, then Infratil is duty bound to record their percentage ownership in the value of that stake as a 'profit'. This is just how equity accounting works. But does that share of the $721m gain over FY2024 from ownership of the CDC stake say anything about cashflows that have been improving (or not) over the 2024 financial year? I would say it doesn't. Thus for CDC we can say that 'declared profit' and 'operational profit' are largely unrelated numbers. And this is why I can claim the respective Infratil share of operational profit (actually a loss) at CDC over FY2024 was -$12.6m, even though the equivalent 'declared profit' over the same time period was +$97.4m, and bears little relation to that other figure.
SNOOPY