Duke Capital Regulatory News (DUKE)

22 November 2023

Duke Royalty Limited

("Duke Royalty", "Duke" or the "Company")

Interim Results for the six months ended 30 September 2023

Duke Royalty Limited (AIM: DUKE), a provider of alternative capital solutions to a diversified range of profitable and long-established businesses in Europe and abroad, is pleased to announce its interim results for the six-months ended 30 September 2023 ("Interim 2024").

Financial Highlights

· Total cash revenue up 35% from the prior period to £14.1 million (Interim 2023: £10.4 million)

· Recurring cash revenue* totalled £12.2 million, up 17% from Interim 2023 (£10.4 million)

· Free cash flow** up 23% to £7.9 million (Interim 2023: £6.5 million)

· Adjusted earnings up 23% to 1.95 pence per share (Interim 2023: 1.58 pence per share)

· Cash dividends of 1.40 pence per share paid to shareholders (Interim 2023: 1.40 pence per share)

Operational Highlights

· Deployed over £18 million of capital into new and existing Royalty Partners

· One new royalty partner added to the portfolio, taking total to 15

· One investment buyback with Instor delivering a triple digit IRR

· Over £40 million of available liquidity for future deployments

* Recurring cash revenue excludes buyback premiums, cash gains from the sale of equity investments and one-off fee income

** Free cashflow is defined as operating cashflow, plus cash gains from the sale of equity investments, less investment costs less interest payable of Duke's debt facility

Nigel Birrell, Chairman of Duke Royalty, said:

"During the interim period Duke was able to post its twelfth consecutive quarter of increasing recurring cash revenue which was a fantastic achievement for the Company. In line with this strong financial performance, the Company also maintained its quarterly dividend of 0.70p per share. Investors can be reassured that the dividend payout remains well covered by operating cashflow with the attractive yield representing a pillar of Duke's ongoing business model and its overall financial discipline.

"Looking forward, I am pleased to say that Duke remains well-positioned for growth. We believe that we have an attractive offering through our private credit and private equity hybrid product, as well as a philosophy that resonates with SME business owners due to our ability to offer a long-term, partnership-based solution which keeps owners in control of their company."

This announcement contains inside information.

For further information, please contact www.dukeroyalty.com, or contact:

About Duke Royalty

Duke Royalty Limited provides alternative capital solutions to a diversified range of profitable and long-established businesses in Europe and abroad. Duke Royalty's experienced team provide financing solutions to private companies that are in need of capital but whose owners wish to maintain equity control of their business. Duke Royalty's royalty investments are intended to provide robust, stable, long-term returns to its shareholders. Duke Royalty is listed on the AIM market under the ticker DUKE and is headquartered in Guernsey.

Chairman's Report

Dear Shareholder,

I am pleased to report that Duke Royalty's results for Interim 2024 have once again highlighted the robust nature of the Company's business model in the face of significant ongoing global economic and political challenges. In particular, I am delighted to say that Duke was able to post its twelfth consecutive quarter of increasing recurring cash revenue during the Interim period.

Duke's simple investment philosophy of providing long dated, senior secured debt capital into long established, profitable SME owner-operated businesses has largely protected the Company from the high levels of volatility that have been witnessed in the public equity markets during the period. The predictable nature of Duke's monthly cashflows alongside its own tight internal cost controls has allowed Duke to report a strong financial performance for Interim 2024. In line with this strong financial performance, the Company also maintained its quarterly dividend of 0.7p per share. Investors can be reassured that the dividend payout remains well covered by operating cashflow with the attractive yield representing a pillar of Duke's ongoing business model and its overall financial discipline.

This strong set of results has been achieved despite the challenging business environment we are operating in. In the last two years, the UK experienced a record-breaking 14 consecutive interest rate increases, a trend that has largely been mirrored in both the EU and North America. Central banks have taken a pause from additional near-term interest hikes with inflation rates now trending back towards their longer-term norms. However, we believe the current elevated level of interest rates are set to remain for some time and we are not expecting to see any cuts until well into the Company's FY25 period. For Duke, the higher cost of borrowing has had a few core effects.

First, it has increased Duke's own debt servicing costs which have put a squeeze on free cashflow margins and second, it has resulted in a general reduction in consumer discretionary spend. Furthermore, there is no question that businesses have become increasingly burdened by wage inflation and a period of stubbornly high power costs. This backdrop has had an inevitable effect on both revenue and profit expectations for some of Duke's partners but, as long term, supportive investors, our investment team is working diligently to ensure they are given whatever help is required.

However, overall I am pleased to be able to report that the Duke portfolio remains well insulated and in a healthy position, protected by its increasing level of diversification. A positive effect that has resulted from the elevated level of interest rates has been the material increase in the cost of all other competing forms of debt. As I have mentioned before, Duke's permanent equity capital base and its long-term lending approach throughout economic cycles have enabled it to refrain from significantly increasing the cost of its offering in the short-term. The deliberate decision to not significantly raise the initial cost allows Duke to evaluate more opportunities through the lens of that company's ability to weather continued economic headwinds.

Unsurprisingly, Duke was cautious on making new deployments in Interim 2024 given the high level of uncertainty in the markets as well as a general declining trend in valuations that we are seeing across the board. The Company did welcome Glasshouse Products LLC as a new partner by entering into an US$11.5 million financing agreement. Founded in 2002 in Texas, Glasshouse is a long-established provider of custom glass solutions including the design, fabrication, sale and installation of glass architectural products and I hope that Glasshouse will become a long-standing core holding in the Duke portfolio as it executes its buy and build strategy. During the period, Duke also announced the successful exit of its investment in Instor Solutions, Inc., a California-based product reseller and service provider for work related to the build-out and migration of data centres. The exit represented the sixth and most profitable exit for Duke to date, delivering a triple digit IRR.

Outlook

Duke remains well-positioned for growth, having created a large and diversified portfolio of royalty investments alongside an exciting pipeline of new deal opportunities. The Company's liquidity position remains robust and the current macroeconomic climate means that demand for Duke's low amortising, patient capital remains strong. Our approach to monitoring our existing investments is collaborative and thorough. We evaluate monthly management accounts and look for signs of stress and aim to be proactive in working with a partner to address any issues. Having good visibility into our portfolio allows us to be cautiously optimistic for the rest of the year. 

Looking more broadly, we constantly review the trends in the financing industry and we are pleased to report that Duke's core product is unique in the market due to its long duration and low amortisation qualities. The Private Credit market is a large and growing segment of the financing sector, and part of its growth has been from Private Equity players expanding into credit. What used to be the domain of the high street banks is increasingly supplemented by alternative financing providers, of which Duke is one. Our growing pipeline underpins our belief that we have a philosophy that resonates with SME business owners due to our ability to offer a long-term, partnership-based solution which keeps owners in control of their company.

Our product is essentially a hybrid between Private Credit and Private Equity, and as the Private Credit explosion has become mainstream in SME lending, we aim to ensure our 'best of both worlds' approach is articulated to business owners in a way they can compare. Therefore, we have embarked on a review of how best to show business owners the advantages of Duke when they are looking for capital. This review is ongoing and we will share the exciting changes with our shareholders in the period to come when they have been finalised. Our product remains the same to new business owners, but how we will engage with them will open up more opportunities for Duke and the goal is to broaden our appeal. We believe we are at the forefront of a large opportunity as Private Credit solutions become more accepted in SME lending.

As always, I am appreciative of the ongoing support of our shareholders and, on the back of a period of continued resilience and growth, I look forward to reporting on the Group's ongoing progress and development in future periods.

Nigel Birrell

Chairman

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

The notes form an integral part of these Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

All income is attributable to the holders of the Ordinary Shares of the Company.

The notes form an integral part of these Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

The notes form an integral part of these Condensed Consolidated Financial Statements.

1. General Information

Duke Royalty Limited ("Duke Royalty" or the "Company") is a company limited by shares, incorporated in Guernsey under the Companies (Guernsey) Law, 2008. Its shares are traded on the AIM market of the London Stock Exchange.

The "Group" comprised Duke Royalty Limited and its wholly owned subsidiaries; Duke Royalty UK Limited, Capital Step Holdings Limited, Capital Step Investments Limited, Capital Step Funding Limited, Capital Step Funding 2 Limited and Duke Royalty Employee Benefit Trust. During the period, Capital Step Holdings Limited, Capital Step Investments Limited, Capital Step Funding Limited, Capital Step Funding 2 Limited were dissolved via voluntarily strike offs. Also during the period, the Group incorporated Duke Royalty US Holdings, Inc., a company registered in Delaware, USA.

The Group's investing policy is to invest in a diversified portfolio of royalty finance and related opportunities.

2. Significant accounting policies

2.1 Basis of preparation

The interim Condensed Consolidated Financial Statements of the Group have been prepared in accordance with UK adopted international accounting standards, and applicable Guernsey law, and reflect the following policies, which have been adopted and applied consistently.

On 31 December 2020, IFRS as adopted by the European Union at that date was brought into the UK law and became UK-adopted international accounting standards, with future changes being subject to endorsement by the UK Endorsement Board. The group transitioned to UK-adopted international accounting standards in its consolidated financial statements on 1 April 2021. There was no impact or changes in accounting from the transition.

The accounting policies adopted in the preparation of the interim Condensed Consolidated Financial Statements are consistent with those followed in the preparation of the Consolidated Financial Statements of the Group for the year ended 31 March 2023.

The Financial Statements have been prepared on a historical cost basis, except for the following:

· Royalty investments - measured at fair value through profit or loss

· Equity investments - measured at fair value through profit or loss

· Royalty participation liabilities - measured at fair value through profit or loss

The Directors consider that the Group has adequate financial resources to enable it to continue operations for a period of no less than 12 months from the date of approval of the financial statements. Accordingly, the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.

2.2 New and amended standards adopted by the Group

There were no new standards adopted by the Group during the reporting period.

2.3 New standards and interpretations not yet adopted

At the date of authorisation of these interim Condensed Consolidated Financial Statements, certain standards and interpretations were in issue but not yet effective and have not been applied in these interim Condensed Consolidated Financial Statements. The Directors do not expect that the adoption of these standards and interpretations will have a material impact on the interim Condensed Consolidated Financial Statements of the Group in future periods.

2.4 Going concern

In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council. After making enquiries and bearing in mind the nature of the Company's business and assets, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future.

The cash flow needs of the Group have been assessed taking account the need for further funding for any of the existing royalty partners and the ongoing working capital needs of the business against the current cash and liquidity of the Group.

Furthermore, there is adequate headroom in terms of the uncalled loan facility in place should it be required.

3. Finance Costs

4. Income tax

The Company has been granted exemption from Guernsey taxation. The Company's subsidiary in the UK is subject to taxation in accordance with relevant tax legislation.

Factors affecting income tax expense for the period

5. Earnings per share

Basic earnings per share is calculated by dividing total comprehensive income for the period by the weighted average number of shares in issue throughout the period, excluding treasury shares (see Note 14). Diluted earnings per share represents the basic earnings per share adjusted for the effect of dilutive potential shares issuable on exercise of share options under the Company's share-based payment schemes, weighted for the relevant period.

All share options, warrants and Long-Term Incentive Plan awards in issue are not dilutive at the year-end as the exercise prices were above the average share price for the period. However, these could become dilutive in future periods.

Adjusted earnings per share

Adjusted earnings represent the Group's underlying performance from core activities. Adjusted earnings is the total comprehensive income adjusted for unrealised and non-core fair value movements, non-cash items and transaction-related costs, including due diligence fees, together with the tax effects thereon. Given the sensitivity of the inputs used to determine the fair value of its investments, the Group believes that adjusted earnings is a better reflection of its ongoing financial performance.

Valuation and other non-cash movements such as those outlined are not considered by management in assessing the level of profit and cash generation of the Group. Additionally, IFRS 9 requires transaction-related costs to be expensed immediately whilst the income benefit is over the life of the asset. As such, an adjusted earnings measure is used which reflects the underlying contribution from the Group's core activities during the year.

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6. Royalty investments

Royalty investments are financial assets held at FVTPL that relate to the provision of royalty capital to a diversified portfolio of companies.

Royalty finance investments are comprised of:

Royalty investment net income on the face of the consolidated statement of comprehensive income comprises:

All financial assets held at FVTPL are mandatorily measured as such.

The Group's royalty investment assets comprise royalty financing agreements with 15 (30 September 2022: 13, 31 March 2023: 15) investees. Under the terms of these agreements the Group advances funds in exchange for annualised royalty distributions. The distributions are adjusted based on the change in the investees' revenues, subject to a floor and a cap. The financing is secured by way of fixed and floating charges over certain of the investees' assets. The investees are provided with buyback options, exercisable at certain stages of the agreements.

7. Loan investments

Loan investments are financial assets held at amortised cost which the exception of the £2.2 million loan issued at 0% interest. The impact of discounting is immaterial to the financial statements. The below table shows both the loans at amortised cost and fair value.

The Group's loan investments comprise secured loans advanced to two entities (30 September 2022: two, 31 March 2023: two) in connection with the Group's royalty investments.

The loans comprise fixed rate loans of £4,652,000 (30 September 2022: £4,872,000, 31 March 2023: £4,652,000) which bear interest at rates of between 0% and 15%.

The loans mature as follows:

Loan investment net income on the face of the consolidated statement of comprehensive income comprises:

ECL Analysis

The measurement of ECLs is primarily based on the product of the instrument's probability of default ("PD"), loss given default ("LGD"), and exposure at default ("EAD"). The Group analyses a range of factors to determine the credit risk of each investment. These include, but are not limited to:

· liquidity and cash flows of the underlying businesses

· security strength

· covenant cover

· balance sheet strength

If there is a material change in these factors, the weighting of either the PD, LGD or EAD increases, thereby increasing the ECL impairment.

The disclosure below presents the gross and net carrying value of the Group' loan investments by stage: