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Bargain shares: Smart buying opportunity ahead of broker upgrades

Efficiency Market Theory dictates that all publicly available information should be priced into a share price. However, EMT has flaws in Simon Thompson’s small-cap and micro-cap hunting ground, as our stock picking expert highlights yet another market mispricing opportunity to exploit.

Efficiency Market Theory (EMT) dictates that all publicly available information should be priced into a company’s share price. However, EMT has flaws in my small-cap and micro-cap hunting ground, otherwise I would not be able to regularly flag up market mispricing investment opportunities.

For instance, there can be a lag between a company making an announcement which has positive implications on its earnings and the market reacting. One explanation is that small-caps are under researched, so investors are reliant on a paucity of broker coverage. Furthermore, sometimes analysts hold back upgrading their numbers until a company releases financial results, so although we are guaranteed upgrades then only investors closely following its progress are aware of this fact. Exploiting information voids is a strategy I adopt because it de-risks the investment, and can deliver attractive risk:adjusted returns in a short time frame, too.

A good example is Venture Life (VLG:92p), a developer, maker and distributor of products for the self-care market, that is set to release a pre-close trading update in the coming weeks that will undoubtedly lead to earnings upgrades as I highlighted (‘Exploiting an earnings upgrade opportunity’, 10 August 2021). It’s not an isolated example either.


A royal investment opportunity

  • Quarterly cash receipts exceed pre-pandemic levels and guidance points to 10 per cent uplift in current quarter.
  • Exit of fourth royalty partner generates internal rate of return (IRR) of 29.4 per cent.
  • Likely analyst upgrades when company issues financial results on Thursday, 16 September.

Duke Royalty (DUKE:41.5p), 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, has made its fourth exit from a royalty partner in the past year and the most profitable one since IPO in 2015. The company has also announced a new royalty agreement with its 12th royalty partner, Creo Tech Industrial, a Canadian holding company that is executing a ‘buy-to-build’ strategy across the country’s engineering, procurement and construction (EPC) services sectors.

The exit from Irish insurance brokerage BHPC, a specialist in the not-for-profit insurance space, has realised net cash of £6.9m and delivered a thumping IRR of 29.4 per cent on Duke’s investment. It means that Duke is in a net cash position and has liquidity of more than £35m to deploy on new investment opportunities after taking into account the CA$8.3m (£4.8m) investment in Creo and last month’s £7.7m investment in new royalty partner, InTec Business Solutions. InTec provides support for UK SMEs outsourcing the installation and maintenance of their IT infrastructure such as cloud based services and data storage.

Both transactions are based on a 30-year royalty term and generate initial cash yields of 13.5 per cent (InTec) and 13.2 per cent (Creo). In addition, Duke is taking an 18.75 per cent equity stake in Creo and has committed to providing a CA$20m (£11.6m) total facility to support further acquisitions.

I last updated the investment case after Duke announced the €10m (£8.6m) royalty agreement with Fairmed Healthcare (‘Bargain shares: Exploiting information voids’, 5 July 2021), since when the board has released a first quarter trading update (to 30 June 2021). It revealed record quarterly revenue of £2.9m, about £0.1m ahead of management guidance, taking Duke back above levels seen prior to the Covid-19 pandemic. Duke has also benefited from the redemption premium received in April (net cash of €1.3m) following its exit from royalty partner, Berkley Recruitment, a Cork-based resourcing and recruitment business. That investment generated an IRR of 16 per cent, further highlighting the conservative nature of the royalty partners’ carrying value in Duke’s accounts. In addition, Duke has issued guidance that indicates cash revenue is set to rise from £2.9m to £3.2m in the current quarter.

Interestingly, house broker Cenkos Securities notes that given the Fairmed transaction (£1.1m of annual royalty income) was “deployed above and beyond our 2021/22 cash revenue forecasts, we expect higher cash revenue than our £12.7m annual forecast.” Analysts are awaiting Duke’s financial results on 16 September before updating their models, but upgrades are coming. Furthermore, a reversal of last year’s Covid-19 induced asset impairments is on the cards to drive up Duke’s net asset value (NAV).

Simon Thompson's 2021 Bargain Shares Portfolio Performance
Company nameTIDMOpening offer price 05.02.21Bid price 11.08.21 DividendsPercentage change (%)
San Leon EnergySLE27.5p40.75p0.0p48.2%
Vietnam HoldingVNH201.4p296p0.0p47.0%
Duke RoyaltyDUKE29p41p1.1p45.2%
Wynnstay GroupWYN424p580p10.0p39.2%
Ramsdens HoldingsRFX142.8p175p0.0p22.5%
Springfield PropertiesSPR135.6p150p1.3p11.6%
Canadian General InvestmentsCGI3,611c3,915c44.0c9.6%
Downing Strategic Micro-Cap Investment TrustDSM69p69p0.8p1.2%
Arix BioscienceARIX177p173p0.0p-2.3%
Average     22.4%
FTSE All-Share Total Return index7,1358,080 13.2%
FTSE AIM All-Share Total Return index1,3841,461 5.6%

The good news doesn’t end there as the quarterly dividend of 0.55p a share provides a 5.3 per cent dividend yield and Cenkos believes that the company is on course to produce cash revenue of £18.6m in the 2022/23 financial year to deliver EPS of 3.2p and support a raised dividend of 2.7p a share. On this basis, Duke’s shares are trading on a forward price/earnings (PE) ratio of 12 and offer a prospective dividend yield of 6.5 per cent. Proforma NAV is around £111m (31p a share) based on historic carrying values after factoring in April’s £32m equity raise, and subsequent exits, implying the shares are priced on a modest 1.33 times conservative book value.

I included Duke’s shares, at 29p, in my market beating 2021 Bargain Shares Portfolio and feel that the forthcoming results and analyst upgrades will be catalysts to drive the price to my initial target of 50p, and perhaps beyond. Buy.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].

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They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on