Interactive Investor

Ian Cowie: the investment trust I’ve bought that’s yielding 6.5%

19th January 2023 11:39

by Ian Cowie from interactive investor

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Our columnist has taken advantage of a recent share price slump to buy an investment trust that aims to provide both income and growth from digital technology.

Ian Cowie 600

Will the war in Ukraine, plus a space race involving the billionaires Richard Branson and Elon Musk, help small shareholders ‘do the double’ with income and growth from digital technology? I only ask because my new investment trust holding in this sector has got off to a good start at a difficult time - plus a negative note from analysts I admire.

Yes, as regular readers may have guessed, I am talking about Digital 9 Infrastructure (LSE:DGI9), an investment trust with total assets of £911 million focusing on what is sometimes called “the plumbing of the internet”, such as data centres and fibre optic cables. In other words, the technology in the background that is needed for you to read this and for me to write it.

Many investors will have heard the tale that the way to make money out of 19th-century gold rushes was not to go panning for nuggets yourself but to sell those hopeful prospectors their picks, shovels and sturdy denims - such as Levi Strauss & Co Class A (NYSE:LEVI).

That partly explains why DGI9 shares were pushed up to trade at a double-digit premium to their net asset value (NAV) last year.

Since then, rising inflation and interest rates have caused many former high-flying technology shares to fall to earth, largely because most of these businesses pay low or no dividend income.

DGI9 was always an exception because it paid decent dividends. But this did not prevent its share price slumping when two fund managers left suddenly last year.

Their unexpected exit, apparently in a row about remuneration, shocked a market that had already lost its taste for ‘jam tomorrow’ stories. DGI9’s shares plunged from their 2022 peak of 118p to the 86p I paid last month.

With all due respect to its former fund managers, I do not believe their departure destroys this investment trust’s fundamental proposition that digital data traffic is growing strongly with revenues and profits to match. So far, Mr Market seems to agree with me because the shares recovered to 95p this week, trading at a 13% discount to their NAV and continuing to yield an eye-catching 6.5% dividend income.

This progress is all the more noteworthy because it has occurred despite a leading investment trust analyst, Alan Brierley of Investec Securities, renewing his ‘sell’ note this week. He explained: “DGI9 has published a useful trading update, including the terms of its vendor loan note (VLN), which we had stated it urgently needed to.

“The company reported that like-for-like earnings before interest, tax, depreciation and amortisation (EBITDA) growth of the portfolio was 5.6% for the 12 months ending 30 September 2022. Furthermore, the terms of the VLN are much less onerous than many feared.

“However, we remain concerned about the company’s dividend cover, which has been severely curtailed by its interest payments and we estimate that pro forma cover is just 42%. We maintain our ‘sell’ recommendation.”

While I respect Brierley’s analysis, I have no intention of following his tip on this occasion. I note that his preferred option in this space, Cordiant Digital Infrastructure (LSE:CORD) has suffered a negative return of just over 20% during the last year, according to independent statisticians Morningstar, while DGI9 is just over 10% down. CORD trades at a 22% discount to NAV and yields 4.8% dividend income.

More fundamentally, despite short-term setbacks for many technology companies, the war in Ukraine reminds us how much we all depend on digital infrastructure. As reported here last November, the Russians are widely believed to have been behind the destruction of subsea cables vital for internet communications.

More currently and positively, Elon Musk’s Starlink satellites are helping Ukraine fight back by bringing internet communications to battlefields with no broadband connection. Musk is best-known for Tesla (NASDAQ:TSLA) but another of his companies, SpaceX, has launched around 3,500 Starlink satellites, roughly half the total number active now in orbit.

Closer to home, the failure of Richard Branson’s Virgin Orbit attempt to launch nine small satellites into space from Cornwall earlier this month demonstrates the technical risks.

Coming down from the clouds, Arnaud Jaguin, DGI9’s investment director, rejects worries that satellites might render subsea cables outmoded. He told me: “We see a very low probability that Low Earth Orbit (LEO) satellites, pose a risk to make subsea cables obsolete in the future.

“Subsea cables are significantly cheaper and fundamentally able to deal with much greater amounts of data.

“LEO satellites can be used as a redundant back-up to subsea cables for security or military purposes - such as Ukraine - and can help to connect commercially unviable or landlocked countries to subsea and terrestrial fibre networks.

“But the average cost is a thousand times lower for subsea cables than it is for satellites. Also, LEO satellites have a lot more wear and tear and typically need to be replaced every five years whereas subsea cables have a lifespan of between 20 and 25 years.”

No wonder an estimated 97% of global internet traffic is still transmitted via fibre optic and other cables, rather than satellites. Talking about remote servers accessed via the internet, Dr Michael Clare of the National Oceanography Centre, pointed out: “The cloud is under the sea, not in the sky.”

To be candid, it’s all a bit beyond the digital ken of this DIY investor whose cerebral software dates back to the 1950s. But investment trusts make it easy to share the cost of professional asset management in this highly specialised sector.

Better still, with a high yield and hopes of gains, DGI9 - which paid me its first dividend on New Year’s Eve - might ‘do the double’ with a good income now and capital growth in future.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Digital 9 Infrastructure (DGI9) as part of a globally diversified portfolio of investment trusts and other shares.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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