IFT - Infratil

[kiora]

Aagh
got it from your earlier post

"One might consider IFT a publicly-traded, infrastructure themed, private equity investor fund."

[Snoopy]

Retail offer oversubscribed, despite Snoopy’s efforts here

I am not here to put people off investing in IFT. I am much more interested in letting investors know what it is they are investing in, and letting them make their own investing decisions from there. In particular, in relation to the flagship data centre investment CDC.

I am reasonably happy with my 7th attempt at estimating the present day profitability of CDC data centres (my post 3754). I was probably a little aggressive with estimating the amount of interest being capitalised. (remember any interest that is capitalised reduces the interest bill). That means my lowly $9m NPAT for FY2024 estimate (on EBITDAF of $271m) could be a bit high. BTW these figures say nothing about the profitability of the datacentre concept. IMO these 'low to no' present day profits have been deliberately engineered by Infratil to keep as much owner equity cash in CDC as possible (tax paid is cash lost from the CDC financial model). If IFT wanted CDC to be more profitable right now, all they would have to do is stump up with more equity and repay CDC debt. It is that simple. But instead, it makes more sense in a growing business to make the best use of the 'owner cash' that you can.

All the excitement of the extra $600m from the capital raise earmarked for CDC? From a valuation perspective that money has already gone, being that capital required to support the borrowing program for the 'under construction' and 'future build' programs' of CDC. There will be no further sudden incremental gains from the $600m. It is effectively in the balance sheet, hiding in the improved valuation of the CDC 'associated asset', as committed expenditure already. (It is the discounted cashflow value of the CDC data centre program that 'is being built' / 'will be built' that is reflecting this money in the balance sheet (by way of jumped up asset valuations) right now).

Future business growth assumptions, despite the industry experience and technical expertise of the people preparing them, are just assumptions nevertheless. And the more highly leveraged the datacentre entity being valued is, the more likely the worst case scenario of multi-million dollar datacentre asset write-downs and a capital injection from IFT shareholders to shore up the CDC balance sheet becomes. Note that I am not saying such things are likely. I am just reminding IFT investors that they are a possibility, depending on how the datacentre market develops in real time.

SNOOPY

[Snoopy]

I was interested in the 4th July Infratil announcement of the revaluation of CDC assets, taking into account the latest confirmed development plans

"Infratil’s 48.25% investment in CDC is now valued at between A$4,159 million to A$4,940 million (with a midpoint of A$4,524 million), up from A$3,783 million to A$4,368 million (with a midpoint of A$4,058 million) at the end of March 2024."

This implies an incremental increase in value $376m-$572m (with a mid point increment of $466m).

The 'incremental future build capacity', which is a reflection of this increased valuation, is as follows:

Site	Incremental Capacity
Sydney	+603MW
Melbourne	+59MW

Notes from the press release

1/ The 'blended cost of equity' used in the valuation is 11.50% between. This primarily resulting from:
1i/ An increase in gearing as a result of higher forecast debt levels as CDC continues investment in its expanded development pipeline.
1ii/ The increase in gearing is partially offset by a decrease in the asset-specific risk premium, driven by the valuer’s assessment of
the status of CDC’s customer discussions and their overall view of CDC’s ability to deliver on its forecast growth.

2/ The risk-free rate has remained constant at 3.90%.

3/ Cost of Equity 11.50%.

4/ Asset Beta 0.55.

5/ Long term EBITDA Margin 85%

6/ Terminal growth rate 2.5%

7/ From a funding perspective, this valuation reflects an increase of ~A$150 million relative to what was assumed in the full year (March 2024) valuation.

8/ Forecast period 15 years (to 2039).

---------------------------

We also know that
"CDC is currently in advanced negotiations with customers for over 400MW of capacity across multiple sites, expected to come online over the next 4-5 years."

If we regard this as a new capacity development schedule, we could say that 400MW / 4.5 years, equals a realistic incremental development schedule of 89MW per year.

We note that the 'Enterprise Value' increment of CDC (being 'Market Capitalisation'+'Total Debt'-'Cash on Hand'=) +$A964m.
OR 'Market Capitalisation'+'Net Debt' = +$A964m.

Net debt as at 30 June 2024 was A$3,262 million (Snoopy note: I presume this is 'Total Debt' - 'Cash on Hand').
As at the FY2024 balance date: Total Liabilities = A$4,254.1m-A$154.7m=A$4,099.4m (assuming all current assets are cash). This means net debt has gone down a minimum of: A$4,099.4m - A$3,262m = A$837.4m in the incremental 3 month period from EOFY.

There is no strict 'market capitalisation' for CDC, as CDC is not independently listed on any exchange. But there must be an 'agreed capitalised value', something Infratil are calling 'market capitalization', which has therefore gone up in value by at least:

Market Capitalisation Increment - $A837.4m = +$A964m
=> Market Capitalisation Increment = $1,801.4m

SNOOPY

[kiora]

https://finance.yahoo.com/news/brook...103000849.html

Of note:When I say Brookfields are no slugs
"The company believes strategic acquisitions should drive its annual FFO per-share growth rate above 10%"

Whereas IFT grows organically within its own developments & achieves far greater growth rates

Few other company in the renewable sector are growing as fast as IFT

[Snoopy]

Notes from the press release

1/ The 'blended cost of equity' used in the valuation is 11.50% between. This primarily resulting from:
1i/ An increase in gearing as a result of higher forecast debt levels as CDC continues investment in its expanded development pipeline.
1ii/ The increase in gearing is partially offset by a decrease in the asset-specific risk premium, driven by the valuer’s assessment of
the status of CDC’s customer discussions and their overall view of CDC’s ability to deliver on its forecast growth.

2/ The risk-free rate has remained constant at 3.90%.

3/ Cost of Equity 11.50%.

4/ Asset Beta 0.55.

It is quite disappointing when a company uses different terms to muddy the waters for what is ostensibly the same thing. The term 'blended cost of equity' is not one I have heard before. Yet a few lines further down, Infratil just use the phrase 'cost of equity' and say it is the same number. So:

a/ Is 'blended cost of equity' and 'cost of equity' the same thing? OR
b/ Are Infratil talking about the 'Weighted Average Cost of Capital' (WACC), where the cost of capital is 'blended' with the cost of debt to create an overall 'discount rate'?

It looks like the answer is a/. The implication is that, despite CDC only operating data centres, the 'cost of equity' is different between different data centres and so the overall result has to be 'blended'. Very strange. Nevertheless, it would be useful to know what the WACC is for CDC.

WACC Formula and Calculation

WACC=(E/V×Re)+(D/V×Rd×(1−Tc))

where:
E=Market value of the firm’s equity
D=Market value of the firm’s debt
V=E+D
Re=Cost of equity
Rd=Cost of debt
Tc=Corporate tax rate (30% in Australia)

​---------------------------

The problem is there is no 'market' information for CDC, as CDC is not listed. So I guess we have to rely on balance sheet information of the same?

The most recent full balance sheet information that we have for CDC is in the Infratil Annual Report for FY2024 on page 80.
Equity= $2,575.6m, Debt $4,245.1m, Total Assets $6,820.7m. There is no information on what quantity of the liabilities is money owed to contractors working on building projects. Likewise there is no information on the quantum of assets are accounts to be collected from customers. So we just have to make an assumption that the quoted debt to asset position of the company is also indicative of the company's financing position. Using the numbers in this way gives:

An equity ratio of $2,575.6m/$6,820.7m = 38.8%
A debt ratio of $4,245.1m/$6,820.7m = 62.2%

I would then make an educated guess that the cost of debt is a couple of percentage points above the risk free rate of return: 3.90%+2.00%=5.90%

Putting all of these numbers into the WACC formula above gives me:

WACC=(0.388×11.5%)+(0.622×5.90%×(1−0.3)) = 7.03%

This is how I would do such a calculation anyway. I would be interested to hear if someone has a different opinion on how it should be done!

SNOOPY

[Snoopy]

Notes from the press release

1/ The 'blended cost of equity' used in the valuation is 11.50% between. This primarily resulting from:
1i/ An increase in gearing as a result of higher forecast debt levels as CDC continues investment in its expanded development pipeline.
1ii/ The increase in gearing is partially offset by a decrease in the asset-specific risk premium, driven by the valuer’s assessment of
the status of CDC’s customer discussions and their overall view of CDC’s ability to deliver on its forecast growth.

2/ The risk-free rate has remained constant at 3.90%.

3/ Cost of Equity 11.50%.

4/ Asset Beta 0.55.

This is the Capital Asset Pricing Model formula for calculating the expected return of an asset, given its risk:

ERi​ = Rf​+βi​(ERm​−Rf​)

where:
ERi​ = expected return of investment
Rf​ = risk-free rate
βi ​= beta of the investment
(ERm​−Rf​) = market risk premium​

I am not sure what the 'market risk premium' should be. My feeling is that the total return of the market should be a figure of the order of 6,7,8 percent. There is of course no formal market for CDC shares. So its performance relative to the market 'βi' which we have been given must of necessity have been a guess. Nevertheless, sticking all of the numbers we have into the above equation gives:

ERi​ = 3.90% ​+ 0.55x​(7.0%−3.90%) = 5.61%

That figure seems quite a lot less than the figure of 9-10% that Spark are quoting for their "NPAT / 'Capital Invested' " in their own data centres. But maybe it is just a reflection of the generally lower profitability a data centre experiences as it gets larger and larger (like CDC plans)?

The other unfortunate flow on effect of this calculation for CDC is that it appears the 'expected return' is lower than the WACC. Good luck with building a successful business model on that premise?

SNOOPY

[Toddy]

Oh well, I guess this investment is not for you then Snoopy.

Using your methodology, what do you consider a better long term investment than IFT on the ASX, NZX?