Barclays downgrades Digital 9 Infrastructure to “underweight” on limited catalysts

Investing.com -- Barclays downgraded Digital 9 Infrastructure to “underweight” from “equal weight,” citing limited near-term catalysts and continued uncertainty around the fund’s remaining assets. 

The brokerage also cut its price target by 20% to 8p from 10p, implying a 2.9% downside to the 16 October closing price of 8p.

In a note dated Monday, Barclays said Digital 9 is entering its final phase with only two portfolio companies, Arqiva and Elio Networks, remaining. 

Although asset disposals in the first half helped clean up the balance sheet by enabling the repayment of the revolving credit facility, the brokerage said the fund’s distributions are now largely dependent on the eventual sale of Arqiva, which accounts for about 75% of its net asset value (NAV).

“Exits have tidied up the balance sheet but distributions are largely reliant on the exit from Arqiva (where most of the equity value is),” Barclays analysts said. 

“We d/g to UW given the timeframe for exit and uncertainty in a levered exit scenario.”

Digital 9’s NAV declined 5% in the first half of 2025, reflecting continued value erosion and the full write-off of the Verne Global earn-out. 

The fund had previously disclosed limited access to performance data from Verne, whose potential earn-out payment of up to $135 million is contingent on 2026 EBITDA targets. 

Barclays noted that disclosed information about Verne’s operations remains scarce, adding to uncertainty.

A small downward adjustment was also made to expected proceeds from Aqua Comms, with Barclays describing the scale of value destruction there as “particularly painful.” 

The brokerage highlighted that expected proceeds of $44.5 million from that sale reflect a low exit multiple of 2.7× last twelve months’ EBITDA.

While confirming an intention to make an initial distribution following the Aqua Comms disposal, Barclays expects it to be around 2p per share, less than half the 4.5p guidance given in May.

Arqiva, which makes up most of the fund’s value, reported £312 million in EBITDA for the 12 months to June 2025, a 0.6% year-on-year increase. 

Media and Broadcast operations, contributing 83% of group EBITDA, saw a 1.2% decline due to market pricing pressures, while the Smart Utilities Networks business grew 1.8%. 

Digital 9’s management does not expect to progress with the sale of Arqiva until after 2027, when key BBC and public service broadcaster contracts come up for renewal.

On the balance sheet, the fund’s attributable debt fell from £747 million to £722 million in six months, but its vendor loan note continues to accrue payment-in-kind interest at a blended 7.5% rate, adding roughly £29 million through June 2027. Barclays said this interest continues to erode value while disposals remain stalled.

Elio Networks, representing about 12% of NAV, showed a 9% EBITDA decline in the first half due to higher maintenance costs following storm damage, even as revenues were steady. The manager delayed the sale process to explore growth initiatives.

Barclays said its downgrade reflects a relative rating approach within the infrastructure fund sector, noting that other funds offer better potential upside. 

“We see limited catalyst potential in the next 12 months and we believe too much hinges on the disposal of a highly levered holding in Arqiva,” the analysts said.

The brokerage assumes a 6x exit multiple for Arqiva and 8x for other assets, unchanged from prior estimates.