Bargain Shares: Small-cap recovery plays

Duke Royalty (DUKE:42p), 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 delivered a record quarter of cash generation.

Normalised cash revenue surged a fifth to £4.7mn on the group’s £160mn portfolio of 15 royalty companies and the board forecast a further increase to £5mn in the current quarter, too. Duke has made £13.3mn of royalty investments in the past three months, including £4.1mn in Intec, a business that provides small- and medium-sized enterprises with IT infrastructure support (data storage, cloud-based services) and £6.2mn in Creo-Tech, a Canadian ‘buy and build’ group focused on engineering, procurement and construction services.

The full benefit of the new investments will be seen in the new financial year when house broker Cenkos Securities expects receipts from royalty investments to rise from £14.8mn to £20.5mn (upgrade from £19.2mn). In turn, this underpins free cash flow estimates of £12mn (3.3p a share). Moreover, the directors raised the latest quarterly dividend by 17 per cent to 0.7p a share, adding weight to Cenkos’s forecast of a 3p a share total payout in the 2022/23 financial year. On this basis, the shares offer a prospective dividend yield of 7.1 per cent and free cash flow yield of 7.9 per cent.

Importantly, net debt of £41mn equates to 25 per cent of the portfolio valuation, so is not excessive nor is a price-to-book value of 1.2 times given that positive resets on royalties should drive valuation uplifts.

Duke’s shares have delivered a 50 per cent total return since I included them in my 2021 Bargain Share Portfolio, and continue to rate them a buy.

Note One: Simon recommended tendering 30 per cent of holdings in Vietnam Holdings at US$4.4528 (322.3p) a share, and tendering 3.9 per cent in the excess application ('Exploiting a tender offer', 4 August 2021), with a view to buying back the tendered shares at the lower market price (284p offer price on 13 and 14 September 2021) when the cash distribution was made during the week of 13 September 2021. Total return reflects these transactions which have reduced the entry point to 188.3p a share.

Source: London Stock Exchange. 

Ramsdens on a strong recovery

• First-half pre-tax profit of £2mn
• Jewellery retail revenue up 50 per cent year on year
• Foreign-currency exchange volumes continue to recover
• Pawnbroking book up 31 per cent to £7.5mn in past year

Middlesbrough-based Ramsdens (RFX:188p), a diversified financial services group, has said it expects to deliver a first-half pre-tax profit of £2mn, having posted a Covid-impacted loss of £0.1mn in the same period the prior year.

The group has reported growth across all activities. These encompass foreign-currency exchange, retail jewellery, pawnbroking and a precious metals buying and selling service. As consumer spending habits normalise and pawnbroking customers look for short-term finance, the group’s pledge book is recovering strongly, rising by more than 22 per cent in the past six months. The high gold price offers added security for lending, too, as well as boosting precious metal buying activity with volumes there back to pre-Covid-19 levels.

Furthermore, as international travel restrictions ease, then holidaymakers are returning to the skies, good news for Ramsdens’ foreign-currency volumes. Prior to the pandemic, the business accounted for more than a third of Ramdens’ annual gross profit, exchanging over £500mn of foreign currency on a margin of 2.5 per cent for 784,000 customers. It is more profitable now, too, given the demise of Thomas Cook and the downsizing of rivals such as Hays Travel.

The group’s retail jewellery sales continue to deliver bumper growth, helped by self-help measures (investment in stock, and improved search engine optimisation and websites), and investment merits of luxury watches.

House broker Liberum Capital raised its annual pre-tax profit and earnings per share estimates by a fifth to £6mn and 14.8p on revenue of £58.9mn, up from a small profit of £0.6mn on revenue of £40.7mn in 2021. On this basis, expect a dividend per share of 7.4p (upgrade from 6.2p) and closing net cash of £13.7mn (44p a share).

The shares have produced a 29 per cent total return since I included them in my 2021 Bargain Share Portfolio, but still only trade on a forward cash-adjusted PE ratio of 9.7, and offer a 3.9 per cent prospective dividend yield. The risk to earnings is skewed to the upside and I raise my target from 200p to 220p. Buy.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, 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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