IFT - Infratil

[Left Field]

Many thanks to Santiago from the other channel for his summary of the recent Wellington IFT investors presentation.

"Main points that resonated :

- the 20b market cap goal in 5-7 years is a focus. 15% annual returns over 10 years is how they think about investments. They have a record of beating that.

- CDC is a massive investment and was presented as extremely compelling. Will be growing loads, and any fears about data centres being white elephants in 10 years was put to bed. They have long term contracts with high grade customers who have a growing need for data storage and computing power. The scale of construction is incredible. Demand is not going away. CDC will be huge. I don't think the market fully realises the scale. The board and management do, and they keep buying their own shares.

- Longroad is not as exposed to the craziness in the US as I feared. By 2028 it will be proving US$600m per year earnings. Bigger than I realised. They will be generating almost as much energy in the US as NZ consumes. They have managed well the political shift away from renewables in the US, and the energy demand is only going to grow. Huge investment.

- Gurin and Kao are both their next CDC/Longroads... huge potential if they come off.

- Wgtn airport runway extension confirmed (through that new tech concrete stuff they used down in Queenstown rather than pushing it out into the ocean) and will be able to take long haul from end calendar 2025.

- they will be divesting businesses that can't scale to their ambition. My guess (there were no hints) would be Wgtn airport and maybe the retirement stuff.

- NZ businesses going well, but as they grow IFT, NZ has a scale problem. Otherwise, they're not as negative on NZ as many other commentators in the media. One is performing well. They're positive about their Contact shareholding (if the deal is approved). Australian investments are now a bigger share of the pie than NZ.
- having sufficient cashflow to continue paying dividends during this period of massive expansion will be challenging, but there was no suggestion that they won't figure this out.

Overall they came across as competent, laser focussed, very clever, and I couldn't help but feel you can invest in an ETF or you can give these guys your money and they'll do some cool things with it, and through them have exposure to their talent and some compelling sectors."

What is IFT worth ? - IFT's  current market cap (at around $10  a share) values IFT at circa $10B NZD.  However,  CDC's recent partial sale provided a valuation of $17B AUD.   In other words,  Infratil's  50% share of CDC is worth over $9B NZD......  in a single asset.

That leaves  One NZ, Longroad (USA), Kao & Gurin (Japan & Singapore,) Wellington Airport, RetireAustralia, Q Scan (Aus) & Medical Imaging  etc etc   - as  currently valued by the market  at less than $1B NZD......... No wonder the CEO's of Infratil and Morrisons have been buying millions of IFT shares!

[Dolcile]

What is IFT worth ? - IFT's  current market cap (at around $10  a share) values IFT at circa $10B NZD.  However,  CDC's recent partial sale provided a valuation of $17B AUD.   In other words,  Infratil's  50% share of CDC is worth over $9B NZD......  in a single asset.

That leaves  One NZ, Longroad (USA), Kao & Gurin (Japan & Singapore,) Wellington Airport, RetireAustralia, Q Scan (Aus) & Medical Imaging  etc etc   - as  currently valued by the market  at less than $1B NZD......... No wonder the CEO's of Infratil and Morrisons have been buying millions of IFT shares!

Hi Left Field, firstly I'm not debating that IFT appears to be undervalued relative to the sum of parts.  However, I think in your analysis above isn't quite right.

My understanding is that the enterprise value of CDC was recently valued at A$17b. However, you need to deduct debt from that to arrive at the equity value of A$13.7b, IFT share NZ$7.3b - a fair bit lower than NZ$9B.

Also IFT has its own debt. So it isn't as simply as comparing $7.3b + other investments, to the market cap of IFT.  You need to deduct the IFT corporate debt. 

This is set out on page 38 (https://api.nzx.com/public/announcement/452356/attachment/444363/452356-444363.pdf) of the year end presentation.  It shows that the Net assets per share is $16.65, still a health premium to the current share price.

[Left Field]

Hi Left Field, firstly I'm not debating that IFT appears to be undervalued....

....Page 38 (https://api.nzx.com/public/announcement/452356/attachment/444363/452356-444363.pdf) of the year end presentation.  It shows that the Net assets per share is $16.65, still a healthy premium to the current share price.

Good on you Dolcile...... as always DYOR

[Basil]

$16.65 NTA per shares less fees = $13.34 NTA after deducting the capitalized value of Morrisons fees.

Based on my research, Morrisons egregiously high fees have averaged just on 2% per annum of NTA over the years.  I think that's VERY high given the size of the portfolio.  It may have been okay when the benchmark fee methodology was set in 1994, but I think its long overdue for review. In the recent Northington report on the takeover of MCK, they applied a factor of nine times the cost to run the company off the value to arrive at adjusted fair value based on NTA.  I think their valuation methodology was sound and it was the best work from them I have ever seen over the decades.

In a nutshell, 2% annual management fee x 9 = 18% discount off the gross value of IFT's assets seems about right when assessing the true adjusted NTA of IFT.

Additionally I think the market is right to be cautious about the value of the CDC data center and the wisdom of having so much of IFT's assets in one sector.
At say $10.30 IFT trades at a ~ 23% discount to adjusted NTA and I note there are many companies on the NZX trading at much higher discounts.

Shares seem like fair value only to me.  Others will see it differently and that's fine.

[Ferg]

Help me understand this.....they are deducting 9 x future years of fees from NTA, but applying that to current day NTA...is that correct?  Does that calculation assume zero growth in NTA over the next 9 years?  If so, isn't that a mismatch?  In other words I expect the fees earned for years 2-9 will be offset by an increased NTA over that same time period....so what am I not understanding in thinking the method used is flawed?

Based on my research, Morrisons egregiously high fees have averaged just on 2% per annum of NTA over the years.  I think that's VERY high given the size of the portfolio.  It may have been okay when the benchmark fee methodology was set in 1994, but I think its long overdue for review. In the recent Northington report on the takeover of MCK, they applied a factor of nine times the cost to run the company off the value to arrive at adjusted fair value based on NTA.  I think their valuation methodology was sound and it was the best work from them I have ever seen over the decades.

In a nutshell, 2% annual management fee x 9 = 18% discount off the gross value of IFT's assets seems about right when assessing the true adjusted NTA of IFT.

[Basil]

Help me understand this.....they are deducting 9 x future years of fees from NTA, but applying that to current day NTA...is that correct?  Does that calculation assume zero growth in NTA over the next 9 years?  If so, isn't that a mismatch?  In other words I expect the fees earned for years 2-9 will be offset by an increased NTA over that same time period....so what am I not understanding in thinking the method used is flawed?

Correct. MCK as you know is a hotel company with a much more stable NTA and management costs than IFT.  You'd probably be more correct when valuing the net present value of Morrisons future fees to make some assumptions around the future growth rate based on average historical growth rates, (I am sure Morrisons key executives enjoy doing that).  That said, on the other hand, you could argue that Morrisons have earned their fees based on the outperformance of the NZX over the years and they only continue to grow their fees exponentially if that continues in the years ahead.  Six one way and half a dozen the other.  I'm happy with assuming a 18% discount to spot NTA is fair but I do have reservations about the valuation of the data center. Only time will tell if Morrisons huge bet on this sector works out well.    https://www.zerohedge.com/technology/data-center-boom-may-turn-long-term-glut-risk-goldman-warns

[Left Field]

Alokdhir's opinion of IFT SP fair value from the other channel........

"Lot of debate ... about fair value of IFT SP based on NAV stated in year end results ...for me easiest way to assess rough current fair value based on NAV is ...NAV stated on 31st March 2024 was $ 14.35 and that helped them raise $ 1.25 Billion at $ 10.15 ...now NAV stated as on 31st March 2025 is $ 16.65 ...thus based on last huge transacted market assessed equity valuation ...current SP should be NORTH of $ 11.80 !!"

Seems we all agree IFT SP undervalued at present.

FWIW - I've been slowly adding IFT to my portfolio since 2022 ..... my strategy was simply to  collect IFT shares when the SP slipped below levels the CEO had been acquiring at. My average SP is in the low $9.00's so I feel 'well positioned'. 

At some stage IFT will achieve a substantial re-rating IMO.

[BlackPeter]

Alokdhir's opinion of IFT SP fair value from the other channel........

"Lot of debate ... about fair value of IFT SP based on NAV stated in year end results ...for me easiest way to assess rough current fair value based on NAV is ...NAV stated on 31st March 2024 was $ 14.35 and that helped them raise $ 1.25 Billion at $ 10.15 ...now NAV stated as on 31st March 2025 is $ 16.65 ...thus based on last huge transacted market assessed equity valuation ...current SP should be NORTH of $ 11.80 !!"

Seems we all agree IFT SP undervalued at present.

FWIW - I've been slowly adding IFT to my portfolio since 2022 ..... my strategy was simply to  collect IFT shares when the SP slipped below levels the CEO had been acquiring at. My average SP is in the low $9.00's so I feel 'well positioned'. 

At some stage IFT will achieve a substantial re-rating IMO.

Before you take NAV as the gold standard of crystal balls - it might be useful to check how other stocks trade related to their NAV.

But first lets look at NAV, shall we? Normally people use NTA (net tangible assets) as one way to fathom "value" (for somebody). NAV however includes intangible stuff like "goodwill" which can change faster than people change their underwear. The intangible value of a datacentre can change fast depending on whether people need it or not. The intangible value of alternative power sources changes significantly whether the alternative powersources are cheaper or more expensive than the conventional ones.

So - NAV is even less useful than NTA to assess some sort of "value".

But lets look at NTA (which for IFT was at its last financials $3.27 per share).

In the retirement industry there is currently something like factor 2 (or larger) between NTA and share price - look at companies like OCA or RYM. Derived from this is the IFT share extremely overrated - should trade around 1.60 per share based on its (still questionable) NTA.

In the real estate business (like KPG, ARV) the factor is currently around 1.5. Why do you think that IFT would deserve such an amazing premium?

Look, you are holding and trying to pull arguments to confimr your views from wherever you can, and - lets face it, on the internet one can always find somebody supporting any view one could imagine.

That's understandable - confirmation bias coupled with endowment bias are some of the strongest human traits. And this is good. This way many people think their partner is best, their god is the only true one and whatever they own is better than whatever their neighbor owns.

Saves humanity a lot of additional conflicts (well, maybe not in the field of mutually exclusive religions, but this is a different theme), but its not necessarily the best approach to get an objective valuation of ones possessions.

I am wondering whether you should try your motto "different thinking"?

What is the value of any datacentre people don't need?

What is the value of a windmill if the country in which it stands uses cheaper oil to run the economy?

What is the value of an airport if people change the way they travel?

What is the value of a me-too phone company in a time when communication prices know only one direction: down?

Not saying the world is crashing down on IFT, since assuming everything going bad is as daft as assuming that everything will run to perfection (which is clearly isn't).

Maybe "different thinking" (your motto) would be to work with likelihoods. How likely is it IFT's best case happens in all its invested areas? How likely is it all goes bad?

Is there anything in between these two scenarios?

Maybe that's what markets currently price in? And maybe markets are (as so often) just a bit optimistic?

[Basil]

I looked into just one of the stunning valuation gains that are claimed to have been made in the last year and ended up with more questions than answers.
Amazing how the paper valuation of Wellington Airport has gone up ~ 50% in the last year whereas AIA shares are up about 5%.  Maybe Wellington airport operates in a different universe to Auckland airport ?

Who would have thought the fair value of a relatively low growth stable property asset could jump by 50% in one year ?  Gosh I bet the likes of ARV which is trading at a ~ one third discount to NTA would have liked to have had that asset in its portfolio.

So how have the valuers come up with this remarkable jump ?  I see from last years valuation they assumed a terminal growth rate of 2.5% but this year that has magically jumped to 3.5%.  That alone has a huge impact on the DCF valuation of an asset.  They've also lowered the risk free rate from 4.85% to 4.50% and cost of capital assumptions have changed as well.

Just as well we know that when it comes to receiving hundreds of millions per annum in fees, there's no way Morrisons would try and influence valuers for their own benefit 

I suspect Mr Market who I note is pricing IFT shares lower now than a year ago, despite these marvelous billions of "on paper" valuations gains is much smarter than many IFT shareholders are giving it credit for.  The market is saying we don't trust these latest valuations. 

The other factor at play here is Morrisons and IFT reputation risk.  The optics on the recent Herald Headline are absolutely appalling
Morrison pockets $456m in fees as Infratil makes net loss of $261.3m Paywalled.  That's so messed up, words fail me.

[Left Field]

BP & Basil. Thanks once again for your repeated concerns regarding any investment in IFT.

Much appreciated, however please forgive me if I continue to ignore your warnings.

[Ferg]

BP & Basil. Thanks once again for your repeated concerns regarding any investment if IFT.

Much appreciated, however please forgive me if I continue to ignore your warnings.

Haha....very droll....looking at BP's post I think he hasn't read the annual report and has no understanding of the NAV that IFT investors talk about.

He is conflating NTA with NAV.  If you looked at that and found the values were poles apart.....wouldn't you hit pause and try to understand it before posting?

[BlackPeter]

BP & Basil. Thanks once again for your repeated concerns regarding any investment if IFT.

Much appreciated, however please forgive me if I continue to ignore your warnings.

You are welcome - and no worries, it matters to me not a bit, whether you agree and what you do with your money.

Other than you do I realise as well, that nobody can predict the future - i.e. I only can point out risks and opportunities instead of pretending to know how the future will look. So yes, there is a chance that IFT's hype component (every stock has one) might stay high for months or even years to come.

Look - these forums are designed to represent different opinions, and this makes them interesting. From time to time however groups of cheerleaders full of endowment bias try to take any disagreement with their views down. Wondering whether we reached this state with IFT?

Quite easy to recognise this ... just look at the discussion around the passed ATH's of some of the other "popular" stocks. There is always a mix of cheerleaders and trolls around who fight any disagreement with their world view with all they have got.

Anyway - last time I checked was IFT (since January) in a downtrend and the Death Cross was in late February. Based on my views of the fundamentals does this market assessment make a lot of sense, however I realise that others might assess risks and opportunities differently and be happy as well to buy based on a good story rather than on good fundamentals. As long as they use their own money for this purpose, this is absolutely fine with me.

[Left Field]

Sorry BP still ignoring your advice.....

Crikey, today I read on the other side, that the exalted KFL is also ignoring your advice. Clearly they don't know anything and are also ignoring your concerns.

Here's Alokdhir's latest FYI.

" Infratil provided two key updates in relation to CDC Data Centres
during the quarter. Early in January, CDC also announced it has
completed contracting for 230MW of capacity by year end versus
expectations earlier in 2024 that this would reach 400MW. Looking
at the bigger picture, this rate of contracting is still much higher than
was anticipated a year ago, however it was disappointing to see
expectations for a higher level of contracting not met.

In February, Infratil announced an investment of A$216 million
into existing investment CDC Data Centres, increasing its stake by
1.6 percentage points to 49.8%, alongside fellow shareholder the
Future Fund which bought another 10.5% of CDC. The overall deal
was conducted between existing shareholders (Commonwealth
Superannuation Corporation, or 'CSC', selling to Infratil and the
Future Fund). CSC ran an external process to establish valuation,
but existing shareholders had pre-emptive rights allowing them
to purchase the shares on offer at the same price offered by third
parties. The transaction implies an equity value for CDC of A$13.7
billion, a 34% uplift on the prevailing valuation.

Despite this, Infratil's share price declined after the deal was
announced. We attribute this to market concerns on CDC's recent
delayed contract wins and skittish sentiment regarding datacentres
generally including concerns Microsoft is pulling back on demand.
During March, Infratil released a newsletter which noted its portfolio
company One NZ remains on track to meet the mid-point of its
earnings guidance range of $580-620 million (set in May 2024). This
is in stark contrast to heavyweight competitor Spark which made
the fourth downgrade to its current year earnings guidance, citing
"spending cuts and mobile fleet reductions across government
and businesses, changes in product mix, and aggressive price
competition in mobile". We note that mobile share tracking we follow
indicates One NZ (along with rival 2degrees) has progressively
been taking market share from Spark and has also moved more
proactively to position for a consumer slowdown.

During the quarter we saw several key Infratil people step up and
buy a significant number of shares on market with their own money,
which is the ultimate vote of confidence in the longer-term prospects
for Infratil and the value on offer. We also bought additional shares
during the period. "


KFL's view about IFT and their claim that they buying the weakness ...shows a seasoned fund manager is happy to accumulate IFT at current prices as they feel its undervalued.

[Basil]

I get it that discussions around terminal growth rates are beyond most people's understanding and most people think valuers cannot be influenced. (I was naïve like that for a long time too).  Its a big call going from a DCF valuation with a 2.5% terminal growth rate to a 3.5% and affects the DCF valuation considerably.
https://site.financialmodelingprep.com/discounted-cash-flow-blogs/Terminal-Growth-Rate-in-DCF-A-Comprehensive-Guide

I am sure there are many big valuation calls in valuing IFT assets and I am sure Morrisons have had a lot to say about them, that's what the vested interest of earning hundreds of millions in performance fees does to any company.

For what its worth, Forsyth Barr in their recent valuation of KPG, (a property company that you would think would grow in line with the economy and inflation at circa 2-3% per annum) used a 1.5% terminal growth rate in their DCF valuation and a risk free 10 year rate of 5%.  Those are very different numbers to what was used in Wellington airport's valuation. 

For those that this DCF valuation stuff is far above your head, maybe just sit back and think.  In an extremely slow economy, how plausible is it that the value of airport assets suddenly jumps 50% in just one year ?  Hmmm.

[Dolcile]

For what it is worth Basil I agree regarding the terminal value.  Anything higher than 2% (midpoint of the target inflation range) needs to be carefully scrutinised.