- Adjusted EPS rises 23 per cent to 1.95p
- Cash dividend per share of 1.4p
- £40mn available for future deployment
Funding provider Duke Royalty (DUKE:31.6p) has reported a 17 per cent hike in recurring cash revenue to £12.2mn in the six months to 30 September 2023, maintaining growth in this key metric for the twelfth consecutive quarter.
The Aim-traded company makes its money by providing capital to companies in exchange for rights to a small percentage of their future revenues. The strong cash performance helped drive free cash flow 23 per cent higher to £7.9mn (1.9p) which in turn underpinned a 0.7p a share cash dividend and a bumper 8.8 per cent dividend yield. Analysts at house broker Cavendish anticipate an identical FCF performance in the second half, implying the £131mn market capitalisation group is being valued on a hefty 12 per cent FCF yield.
True, reported pre-tax profit of £3.8mn was almost two-thirds below the prior half year figure, which had been boosted by £5.3mn of positive fair value movements on the group’s portfolio of equity and royalty investments. This time round, Duke took a £3.5mn reversal on its £11.6mn equity investments and a small £0.7mn hit on the £205mn portfolio of royalty and loan investments. It’s not something to be concerned about. Adjust for portfolio movements and adjusted EPS increased by more than a fifth to 1.95p. On the same basis, analysts at Cavendish expect full-year underlying EPS of 3.8p, up from 3.1p in the 2022-23 financial year, which implies the shares are rated on a forward price/earnings (PE) ratio of 8.3.
Well-funded balance sheet
Although the board took a conservative approach in the first half, deploying £18mn in three follow-on investments and one new royalty partner, this is not due to a lack of demand for what is essentially a hybrid finance product that sits between private equity and private credit. Its long duration and low amortisation structure makes Duke’s core product unique in the market for SME lending.
Moreover, the sharp rise in interest rates in the past two years has had a material impact on other competing forms of debt from alternative providers that are unable to take Duke’s long-term lending approach throughout the economic cycles. With £40mn of liquidity at its disposal, the group is well funded to add to its portfolio of 15 royalty partners.
It’s an approach that is delivering returns when exiting investments, too. In March 2023, Duke invested $8.75mn (£7mn) in a California-based product reseller and service provider in the data centre space. The investment supported a shareholder buyout which transitioned equity control to the current executive management team, thus enabling significant value creation for the company’s shareholders upon the sale. The royalty provider realised a $2.4mn gain on the exit of the investment 11 weeks later.
True, even after factoring in dividend payments, Duke’s share price is down five per cent since my last buy call (‘A royalty play with an 8% yield’, 4 July 2023). However, the portfolio is in good shape as the cash generation highlights and that alone warrants a narrowing of the 19 per cent share price discount to book value. Add to that a hefty dividend yield of almost nine per cent and the lowly rated shares are worth considering for income seekers. 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 at £16.95 each plus P&P of £4.95, or £25 plus P&P of £5.75 for both books.
