DUKE - Simon Thomson IC GURU - bargain shares for 20215 Feb 2021 12:08
Shares in Duke Royalty (DUKE), 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, are trading 14 per cent below pro-forma NAV of 30.6p a share even though the group is set to enjoy a strong profit rebound.
Prior to the Covid-19 pandemic, the high yielding shares traded on a 10 to 40 per cent premium to NAV. Moreover, as a sign of the directors’ confidence, the board reinstated the 0.5p a share cash quarterly cash dividend in the final quarter of 2020, the annual pay-out equating to an attractive dividend yield of 7.6 per cent. The interim results released at the tail end of last year explain why the shares are firmly in bargain territory for multiple reasons.
Strong drivers for a re-rating
Firstly, seven of Duke’s royalty partners have maintained their monthly cash payments throughout the Covid-19 pandemic while four of the five partners that entered forbearance agreements have come out of forbearance. The agreements enabled these partners to defer payments to help them navigate through the Covid-19 crisis last year, but Duke protected the interest of its own shareholders by equitising the lost income. It now holds 30 per cent equity stakes in three royalty companies which offers shareholders additional investment upside as the economy recovers.
Secondly, having seen cash receipts decline from over £2.8m in the final quarter of the financial year to 31 March 2020 to £2m in the first quarter of the 2020/21 financial year, Duke’s royalty partners have experienced a significant upturn in trading. Indeed, cash receipts were £2.4m in the final quarter of 2020, a sum that covered all of Duke’s annual operating costs of £1.8m.
Thirdly, having previously booked non-cash write-downs of £12.6m on its royalty portfolio and a £2.9m impairment on its loan book to reflect the forbearance of some royalty partners in the 12 months to 31 March 2020, investors can expect these impairments to start to reverse as trading of Duke’s royalty partners improves during the economic recovery. Moreover, even after impairments, the £82.7m fair valuation of the portfolio is only £7m shy of cost and it is currently generating annual royalty payments of £10.38m, a cash-on-cash yield of 12.5 per cent.
Fourthly, Duke exited its largest investment in Dublin-based telecoms and IT and network specialist Welltel at the end of last year. The disposal was pitched at a 17 per cent premium to Duke’s carrying value of £13.2m, highlighting a conservative approach to valuations. Proceeds from the sale left the company in a net cash position. Duke also has a £30m credit facility which it can use to make further high yielding investments. The directors are evaluating 14 active investment opportunities.
This was also the second exit since the autumn. In September 2020, Duke made its first portfolio exit by realising £2m from its investment in Dublin-based B2B technology pl
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