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Duke’s royal credentials

Royalty financing is a relatively new funding source for businesses seeking alternative forms of capital investment, but eye-catching financial returns make it well worth investigating

Duke Royalty (DUKE:45.2p), an Aim-traded company that makes its money by providing capital to companies in exchange for rights to a small percentage of their future revenues over a typical term of 25-40 years, has reported a robust trading update ahead of the release of its annual results on Monday 9 September.

Having raised £44m of new equity capital and trebled the number of royalty partners to 12 in the 12 months to 31 March 2019, the business has subsequently posted record quarterly cash revenue in the first quarter of the 2019/20 financial year. This added credence to the forecasts of analysts at house broker Cenkos Securities that point towards Duke doubling adjusted pre-tax profit from around £4.4m to £8.9m in the 12 months to end March 2020, based on forecast revenues rising from £6.1m to £10.9m. On this basis, expect fully diluted earnings per share (EPS) to increase by from 2.2p to 3.9p and support an annual dividend of 3.4p a share, up from 2.8p a share paid in the 2018/19 financial year. This means that Duke’s shares trade on a forward price/earnings (PE) ratio of 12, offer a prospective dividend yield of 7.5 per cent, one of the highest on London’s junior market. They are also rated on a modest 1.2 times price-to-book value.

A key take for me is the ongoing strong operational performance of Duke’s royalty partners. The terms of the royalty agreements are such that in the first year the royalty partner typically pays Duke Royalty a monthly distribution or royalty equal to 12-15 per cent a year of the financing amount. In the second year, and each year going forward, the monthly distribution is then linked to the year-on-year growth in the revenue of the royalty partner collared at 6 per cent a year of the total increase or decrease in the royalty partner’s revenue over the prior year.

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