Value Investing | @DGI9 - Falling Knife Or Opportunity?

13th Feb by steve30

26 comments 1135 reads

Victor Hill who mainly concentrates on large caps, unusually mentioned this small cap, pointing out its large discount to net asset value. The Stockopedia stockreport seems to be quite misleading as the company has large debts not reflected in the stock report, and has cancelled its dividend. (Tell me if I've misinterpreted the stockreport).

Digging in, @DGI9 has assets of £1,157m (Aqua comm £253m; Verne global £498m; Elio £58m; Arquiva £348m). However it also has gross debt of £554m of which £375m RCF needs to be refinanced in 2025, leading to a fundamental uncertainty of going concern. So net assets are £603m. Shares 838m = 72p assets per share if book value is received (e.g. not a fire sale).

It seems the company has over-extended itself, and does not have the income or cash reserves to meet future required capex so has decided to wind itself up. The initial sale of Verne Global has been agreed for $575m (c.£456m) to Ardian France, which is around the reported nav, but the Icelandic anti-trust authorities have opened an anti-trust enquiry putting the sale on hold for c 100 days from 8.2.24, causing the shares to tank.

So, is this a buy at these prices as 17p gets you 72p in net assets, or is the company going to fail?

Unlock with Email

Unlock with Google

Already have an account?
Login here

ACounsell

19th Mar

Digital 9 Infrastructure (LON:DGI9) on the way down again - off 5.5% today. The Verne Global transaction completed on Friday so that would seem to be good news but the market doesn't agree! Perhaps investors are unhappy with the allocation of the £325.8m received with £273.5m going toward payment and partial cancellation of RCF (Revolving Credit Facility), £17.0m transaction costs (Investment bankers salaries I assume!!!) and £23m for 'possible future liabilities arising from certain VAT related indemnification provisions and will be available for additional RCF repayment and cancellation if and when an insurance policy to cover these potential future liabilities will be taken out'. No idea what this is about but it doesn't inspire confidence. A deferred consideration of a further £19.5m due no later than 26th April 2024 will be used for additional repayment and cancellation of the RCF which after these transactions will be reduced to £80m. Further into the future, sometime in 2027 probably, assuming Verne Global earn out conditions are met , another £106m will be paid to Digital 9 Infrastructure (LON:DGI9). I don't have enough information to assess what might be a possible return when and if(!) the various remaining assets are disposed off but would be interested to hear any views on the potential cash per share that shareholders might recover.

donald pond

27th Mar

The farce continues, as the 2 adults appointed to sort this out - Messrs Boleat and Miller - have both stepped down, leaving the incompetent original board still in place. I think this demands action and so have written the following emails. I would be grateful if anyone who shares my concerns and views on a likely solution writes in a similar vein.

To Triple Point

contact@triplepoint.co.uk

Thank you Charlotte and I note that I have yet to receive a response within the 20 day period outlined in your letter.
I wish to expand my complaint further to cover the recent abrupt and unexplained departures of Richard Boleat and Brett Miller. They were appointed specifically to bring fresh blood to the board and to see them step down so soon is extremely disappointing.
I have a large social media reach and from multiple platforms it is clear that retail investors have lost all confidence in the board and in Triple Point. This has been exacerbated by the recent reckless and incomprehensible spending on financial advisers, with £17m accruing to Goldman Sachs alone, and Liberum, Peel Hunt and JP Morgan all appointed to provide services to the company. It appears that the focus of the board is on spending as much money on advisers as possible. This is, in my view, grossly negligent and indicative of an emphasis on protecting the directors, who appear out of their depth and floundering, from any further liability rather than acting in the interests of shareholders.
The focus fn the board should be squarely on minimising costs and maximising the proceeds of sale of the remaining assets held by DGI9. At first glance, the proposal of Messrs Boleat and Miller to become a self-managed investment trust had merit and many shareholders are frustrated that this could not have been explored further.
The frustration investors feel at Triple Point continuing to accrue fees based upon an NAV that has no credibility is embarrassing. That the board and Triple Point have not addressed this yet is a gross failure of governance and of the fundamental duty to treat investors fairly.
I would at this point like to put myself forward for the role of director at DGI9. I am a Jersey qualified advocate and was for 10 years a director of GCP Infrastructure Fund, a FTSE 250 company. Given the disastrous performance of DGI9, it is surely time for a new board to be constituted who can look afresh at the decisions made that have led to an investment that was widely perceived as a relatively safe play losing over 80% of its value.
I would suggest a board of Messrs Boleat, Miller and myself would at least create confidence that all avenues to protecting shareholder value are being pursued.
I am sharing this email on social media and with the Jersey Financial Services Commission and encouraging others to write to you in support of this approach.
Yours

To: info@jerseyfsc.org

Dear Sir/Madam,
I used to work in a senior role at the JFSC, and thought I would share the above complaint with you, a copy of which is attached.
Digital 9 is a Jersey company listed on the LSE that has lost over 80% of its value and become an embarrassment. The board appear unable to hold the manager to account and, most worryingly, Richard Boleat and Brett Miller, two experienced professional NEDs brought in to sort out the mess have stepped down after they clearly felt that they were not being listened to.
This is causing a huge loss of investor confidence on top of the destruction of shareholder value. It is clear that the manager, Triple Point, did not understand the financial implications of one of the investments and they made, and the board did not have the wherewithal to hold them to account. It is hugely concerning from a corporate governance perspective that the board that were unable to understand what they are doing are still in place, while the directors appointed to bring new expertise have left.
The time has come for the regulator to step in, both in order to assist investors and to support the reputation of the Island.

Charles Mitchell

Donald- having chased to-day just had a response. Says little. Board and Triple point need replacing. I no longer hold- managed to make a reasonable short term trade. Monitoring the situation - might have another trade if price weakens .

As Charles Mitchell noted there is a reply from Triple Point today which I have also received. You will probably have received it today but if not I can forward to your email address if you wish. As I, foolishly it seems, continue to hold Digital 9 Infrastructure (LON:DGI9) I share your concerns about the latest board resignations and the cash spent on financial advisers. Your emails sum up the farcical situation which doesn’t augur well for shareholders getting much of their investment back from the so called ‘managed wind down’. Good luck with your efforts to reconstitute the board but I fear that any cash left for the shareholders will not amount to much. Hopefully it will be more than the current share price!!

28th Mar

Yes, I got the reply as well. And I see an RNS today reiterating an NAV of above 80p. But why do we need 3 advisors!

Do we believe todays Net Asset value announcement ?

"The Board's assessment of the unaudited portfolio valuation is on the basis of fair value, defined by the International Financial Reporting Standard 13 "Fair Value Measurement" ("IFRS 13") as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date", commonly known as the 'willing buyer, willing seller' basis. In the context of the now approved and forthcoming Managed Wind-Down following the result of the General Meeting on 25 March 2024, the value realised in an actual sale (or 'market value') could be higher or lower than the fair value disclosed in this announcement."

If the non reaction of the share price is anything to go by the ‘unaudited’ NAV of 84p is considered to be a fantasy! If we get 50p from the managed wind down I would be surprised -at least that would reduce my loss from the 80% it currently stands at. The statement you have highlighted in bold might be legally required but does I suspect convey the board’s belief that realisation of 84p is highly optimistic with close to zero probability!

Liberum have today issued a TP of 96p, which prompted me to write this to Triple Point.

I am due to have a call with the Chair of the board, Charlotte Valeur, on Wednesday. If anybody has any questions they would like me to ask let me know.

"The bulletin boards are full of fury at today's RNS, which, despite being through 3 highly paid investment banks, has left many baffled. The greatest frustration of all is why professional fees are ballooning out of control.
Why does a company in wind down mode need 3 investment banks to advise them or routine matters, plus Goldman Sachs on more specific matters?
I note today that Liberum issued a note with a target price of over 96p, but it is clear that nobody believes these figures and investors do not see the value in paying expensive advisers to publish figures that are met with derision.
The current gulf between the share price (currently 21p and unchanged on the day) and the NAV is, as someone on Twitter put it, the discount being applied due to a lack of faith in the ability of the board and the manager to realise the NAV. Triple Point should really consider their position here.
The unanimous view on social media is that the board and manager are out of their depth and in their panic are paying extortionate fees to multiple advisers. This is in my view a breach of fiduciary duties. The sole focus now should be on preserving the value of assets and minimising expenditure.
To be told today that £2.4m in fees were incurred in the second half of last year in respect of legal advice relating to a strategic review sums up the complete disregard for investors. That equates to around 3,000 hours of lawyers charging an average of £800 per hour. Or a team of 4 senior lawyers working full time. It simply isn't credible, and is not something that anybody fulfilling their fiduciary duty would countenance."

Donald- if the Board had any sense of decency they would call an online meeting so we can all discuss this with them. Managers do seem to forget boards- I noticed SMT managers were explaining the buyback- really that should be the board-in my opinion.

I agree but the board did a webinar about a month ago where Charlotte Valeur read from a script and no questions were accepted. The board here appear like rabbits stuck in headlights and all they can think of doing is paying advisers a fortune to make decisions for them. Obviously terrified of being sued.

Do you know any of the big shareholders ?

steve30

2nd Apr

Following the General Meeting held on 25^th March, it is interesting to note:

1. Triple Point has been given 1 years notice in accordance with its contract

2. The sale of Vern Global for $415m + $25m (+ $135m subject to meeting performance targets) is broadly in line with the assessed NAV. High costs (as noted in this discussion) of £14.4 million for transaction advisory services, include £5.8 million for financial advice, £5.8 million for legal advice, and £2.8 million for vendor due diligence, tax, and other advice and expenses. As the Board states the high costs reflect the transaction's complexity in contemplating different transaction structures and executing the sale of three separate legal entities in three different jurisdictions.

3. The RCF has been mainly paid down leaving a manageable rump c£80m, which takes away a material uncertainty.

4. The NAV of the assets will be evaluated and reported by PwC the auditors at the end of April. In the meantime (as reported by the Board), the reported NAV has been provided by an independent valuer. Even if wildly wrong (say overvalued as double the disposal value) this still leaves the company massively undervalued.

Disclosure - I hold shares in the company.

Dunco

Regarding 4, this is really a gamble on the Arqiva disposal. Are you familiar with the history of this asset?

I am aware DGI9 bought the 48% from CPPBI in Oct 22. Arqiva is valued at £348m, and is cash generative (£340m EBITDA 2023) so DGI9 holding is valued at approx 2x earnings. There is a large accrued shareholder loan interest repayable 2029/30 which will prob be converted into equity leading to massive dilution, but even if this Arqiva holding was written down to zero, it still leaves the company undervalued. What am I missing?

steve30 it could be really undervalued- but given the recent history it is hard to have confidence. I am waiting until Donald reports back after chat with the Chair on Weds.

It's had a pretty patchy M&A history, so not sure how this time will be any different. 2023 EBITDA figures are fairly meaningless given broadcasting contracts are coming up for renewal (currently very favourable with >70% EBITDA margins).

3rd Apr

Well, I just had an hour and a quarter chat with the board, Charlotte, Aaron and Galiena.

They were very open but didn't say anything that I felt was confidential. The upshot of it doesn't really add much to what we already know.

1) The fund was launched as a high yield play. That was, with hindsight, probably a mistake, but at the time of launch wealth managers only wanted yield so that is what the manager provided. But the end product was a mishmash of capital hungry growth stocks and a dividend being paid out of capital.

2) Arqiva was the way to address this and was intended to be the cash cow. Unfortunately, the short term RCF was the problem. I am not entirely convinced about this, as at the time the acquisition was announced, inflation was already running at 9%. On the other hand, I held shares in GCP back then and remember selling them in the 120s in July 2022, so although inflation was running high, yield stocks had yet to collapse. Anyway, they had planned to manage the RCF by issuing shares but that couldn't happen so servicing the RCF became the focus.

3) The Arqiva shareholder loans are not relevant. All shareholders have them: they could be written off and what you would lose on the loans you would gain on the equity. So don't worry about them.

4) The NAV is sound. All of the underlying assets are performing well, though some need more capital if they are to make the most of the opportunities available.

5) Current debt is manageable.

6) There is a strong sense the market doesn't understand Arqiva. Macquarie are currently looking to sell their 25% stake and that might provide more insight to the market.

7) The big shareholders here are the wealth managers. I suggested, and the board didn't disagree, that these are more likely to be selling into strength rather than adding. The board were very frustrated at the lack of market response to the last few items of news, which they thought were very positive. But as with much of the UK market, any strength is being sold into, and most managers would sooner sell the shares for 22p than explain to the clients why they were still holding onto them.

8) They weren't looking for sympathy, but this is clearly something that the board are spending a lot of time on.

9) They didn't say much about the departure of the 2 new directors, but did say that they felt the nature of the underlying assets meant that a self-managed fund wouldn't be popular with many investors. I believe that Brett Miller has been involved in self-managing a couple of debt funds before, but this is a different beast.

10) The main sense was one of frustration. They clearly understand everyone else's frustration too (Aaron mentioned he had bought in at launch, prior to even being appointed to the board). The assets are good, they are performing well, but the market just won't recognise any of this. We discussed how to improve this and it was agreed that communicating better the cashflows coming from the operating businesses and any sales, and how these are ample to service debt and manage investment into the existing portfolio was key. Charlotte kept emphasising that the assets are good and that it would be madness to sell them for less than a fair price.

Overall I was left thinking that the share price is far too cheap. The NAV probably is about right, but the volumes here are so low that all it takes is one or two sellers and the share price is knocked back. There is always the chance that a bidder comes in for the lot.

So, it is far too cheap but I don't know what will be the catalyst for that to change. That's the sum of it.

That's very helpful. thanks.

Thanks Donald

4th Apr

I have bought back into DGI9 this morning. Let us hope the Board's marketing / communications improve.

@DGI9 - falling knife or opportunity?

Unlock the rest of this article with a 14 day trial

About the Author

Steve30

26 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...