IFT - Infratil

[Snoopy]

There being a lot/too many asumptions there I'd say

One of my collegues always said assumptions are the MOAF

Assumptions are there to be challenged, which is why if you use assumptions, you should always document what they are. If you think one or more of the assumptions that I have used should be different, then feel free to suggest.

SNOOPY

[LaserEyeKiwi]

Wellington council confirms sale of its Wellington Airport holding will proceed (there was a last minute challenge to reconsider)

[Ggcc]

Wellington council confirms sale of its Wellington Airport holding will proceed (there was a last minute challenge to reconsider)

https://www.rnz.co.nz/news/political...are-sale-fails

[Toddy]

Wellington council confirms sale of its Wellington Airport holding will proceed (there was a last minute challenge to reconsider)

Excellent outcome. WCC was a terrible partner to be in business with.

Im looking forward to seeing what the new ownership structure will look like. Whether or not it's IFT on its own, or a partner with big pockets.

[Ggcc]

Excellent outcome. WCC was a terrible partner to be in business with.

Im looking forward to seeing what the new ownership structure will look like. Whether or not it's IFT on its own, or a partner with big pockets.

At the road show it was mentioned that they had a good working relationship with WCC and it was positive to keep them as shareholders. Although if they wished to sell their shares at the right price IFT would be keen to buy. Personally it may become a new NZX float if WCC want too much for it and IFT could benefit that way and slowly sell off their shares onto the NZX together with WCC. Positive for IFT either which way.

[Snoopy]

Recalculating Net CDC Profit after once again revising interest charges

iie/ 0.7 x (0.4824x$130.7m - $61.5m - $19.5m) = -$12.6m

I have lengthened the depreciation profile, and increased the interest cost to something more realistic, now that I have realsed the debt burden at CDC is much greater than I had previously thought, The result is that the net profit I thought I had, has turned into an operational loss (-$12.6m). Yet the declared profit was +$97.4m NPAT, the share of CDC's profit owned by IFT actually achieved.

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

[winner69]

WCC business acumen is zilch …they’ll give it away

Ex Infratil guy Tim Brown voted in favour (of Long Term Plan) of sale


Sale no certainty ……working on options and talked about again December apparently

[Toddy]

At the road show it was mentioned that they had a good working relationship with WCC and it was positive to keep them as shareholders. Although if they wished to sell their shares at the right price IFT would be keen to buy. Personally it may become a new NZX float if WCC want too much for it and IFT could benefit that way and slowly sell off their shares onto the NZX together with WCC. Positive for IFT either which way.

IFT still have to cuddle up to the Council until any deal is done. So they are always going to say that they are great.

[Pegasus2000]

Thanks Snoopy for your own research and view.

[Snoopy]

Recalculating Net CDC Profit after once again revising interest charges

iie/ Total debt, assumed as a constant value across the year was $4,251.1m. Let's say that USPP funding and other bank funding was secured at a rate of 3% (a pure guess on my part). That means the annual interest bill for CDC would be: 0.03 x $A4,251.1m= $127.5m

And the Infratil share of that would be: 0.4824 x $127.5m = $61.5m

We guess that the CDC assets in operation today earn 12.5% on the original capital outlay (refer post 3661). This means the price of assets on the books is $97.4m/0.125= $780m.

Now, 1/40th of that figure is $19.5m. Assuming 'F' (which is generally reserved to symbolise one off non-operational transactions), needs no further adjustment, we can calculate the implied IFT share of NPAT from the EBITDAF figure quoted as follows:

0.7 x (0.4824x$130.7m - $61.5m - $19.5m) = -$12.6m

The loss is determined by the gearing of CDC which will have been decided upon by Infratil and its ownership partners. My inkling is that CDC has been designed as a company with near zero earnings for tax reasons. It could easily become profitable by having less debt in its underlying structure. But to avoid paying back some of Infratil's injected capital as a 'tax bill', Infratil have kept the interest bill high. This is what accountants call 'tax efficiency'. So it looks like CDC is losing money, or making a very modest profit on 'normal operations'. I certainly would not have predicted that, prior to me tackling this calculation, starting at the weekend just gone.

One thing I did not comment on in my NPAT calculation on CDC was the cashflow position. Depreciation is a non cash item. And apart from a little routine maintenance, I would predict very little Capex is required to keep these new 'Cooling Buildings' in tip top shape for at least a dozen years. Despite the $12.5m 'operational loss' I have deduced that CDC made on its data centres over FY2024, by contrast, the cashflow position is positive.

0.7 x (0.4824x$130.7m - $61.5m) = $1.1m

Think for a moment how advantageous this is for Infratil, via CDC. CDC gets a tax refund of some 0.3 x $12.6m = $3.8m per year. They can use that money, plus the $1.1m of positive cashflow each year to help play their hefty interest bill. But, best of all, because no income tax is due, all of the share capital that has been put into CDC to develop that business can be retained within that company. No capital needs to be paid back as tax. This showcases how smart those financial engineers at Infratil really are, keeping the business model as 'capital light' for shareholders as they can..

SNOOPY