Towercos signal the prospect of healthy returns

I’m fairly sure that adventurous investing types don’t need much cajoling to recognise that we live in a world of exponential growth in online data traffic.

Those charts showing ever-accelerating demand because of (choose your preferred option) the “internet of things”, video, virtual working or the rise of ecommerce have become de rigueur as analysts breathlessly outline a digital future.

As online gluttons we require a digital hardware infrastructure spanning everything from broadband fibre to the home and data centres in big cities to transcontinental cable lines and towers full of antennas that connect 3G, 4G or 5G traffic.

Inevitably, the word “infrastructure” also implies a more specific investment opportunity — assets that generate a steady income, which will hopefully grow over time as all that demand kicks in. The hitch is that for most private investors the options have been fairly limited, especially in Europe.

In the US there has long been an established subsector of real estate investment trusts (Reits) which invest in the towers and base stations that enable mobile internet, many listed in the table below.

These towercos, as they are called, are structured (like Reits) as tax-efficient income vehicles, although the yields on them tend to be rather puny. That weakness is not because of meagre cash flows — it’s a profitable business jamming all that equipment on a tower — but because valuations are quite literally reaching for the sky. Many of these vehicles trade on insane multiples and their shares have doubled or trebled over the past few years.

But that doesn’t mean that they are not still interesting. If I had to choose, I’d suggest that Switch Inc and CyrusOne sometimes look a bit unloved, particularly by comparison with the giants such as CrownCastle.

From a slightly different angle, I’d also pay close attention to Colony Capital, a large hedge fund now turning into a dedicated digital infrastructure specialist called Digital Colony. Once the transformation is complete, it will manage its own assets as well as a suite of funds for other investors focused on this space. The shares have shot up in value in recent months, but in my view the asset management possibilities are huge.

In Europe there are businesses equivalent to those e-Reits, with outfits such as Helios Towers trading in London and Cellnex Telecom in Spain. In a typically adventurous way, I like Helios because of its strong market position in the ultimate data growth market: Africa. If it hits analysts’ estimates for earnings growth, then its shares are not outrageously overpriced.

To that list of European towercos we can add Vantage Towers, trading in Germany. This is a new spin-off consisting of European towerco assets owned by Vodafone. It is not cheap by most metrics but it’s a damn sight cheaper than many of the US towercos in the table below, and I think it will appeal to the cautious institutional infrastructure investor who wants to spice up their portfolio with some digital action.

For my money, though, I’d prefer to own shares in its largest shareholder Vodafone, which look a bargain — and, for the record, I do.

Arguably the simplest and most elegant way into this niche is via one of two listed digital infrastructure funds which floated in the past few months on the London market. The first and still the biggest by assets under management is Cordiant Digital Infrastructure, which is overseen by Cordiant Capital, an experienced Canadian investment adviser which surprised everyone in the market by raising over £350m.

Then in March came D9 Digital Infrastructure, a vehicle managed by Triple Point, which raised £300m on a very similar mandate. I invested in both at IPO. They share common characteristics, investing in a combination of towers, base stations, data centres and fibre broadband businesses, though D9 is more focused on oceanic cables linking North America and Europe.

They both aim to provide investors with a total return of about 9 to 10 per cent with 4 per cent (Cordiant) to 6 per cent (D9) in dividends, which should grow over time.

Given the sky-high valuations on equivalent US assets, I’d point out that in the case of D9 at least, many of its seed assets came into the portfolio at between 10 and 15 times earnings. I’m slightly more biased towards D9 given that it has a big seed portfolio of assets already in the fund and producing cash now — but both funds tick the box for me.

Like many growth-oriented asset classes today this is one of those spaces with eye-watering valuations. But I suspect many adventurous types will still find a good reason to own them.

David Stevenson is an active private investor and has interests in securities where mentioned. Email: Twitter: @advinvestor


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