Duke Royalty (DUKE.L, Market Cap ¬£46m, 19p, 2.2% of JIC Portfolio and 3.9% of JIC Top 10)
Trading and dividend update:
Conclusion: I thought a re-assuring statement with revenue holding up reasonably well given the circumstances. Many of its royalty partners will be benefiting from government furloughing schemes, which continues until the end of October. While we are hopefully through the worst, I think the company is correct to act prudently with respect to cash and pay a scrip dividend. Things could get worse and perhaps some of its royalty partners will not survive, leading to write-downs. Having said that, the share price action over the last month seems to be pricing in a very poor outcome for the company. In my opinion, one that is not justified by what is occurring in the real world. Based on the cash dividend, it is on a 19% yield. It is not unreasonable to suggest it might halve the dividend for the scrip, putting the yield at 9.5%. Seems very cheap to me. I need to ponder whether I should change the Risk rating from High to Medium, which would allow me to increase the position from the current 2.2% to 4.0%, but I am tempted. In the meantime, a happy holder of a stock which should see a strong recovery as the UK, European and North American economies re-open.¬†¬†Happy Holder!
Its royalty partners are not surprisingly being impacted to a greater of lesser extent by the lockdown
It is working closely with partners and in some cases has ‚Äúelected to either accrue, capitalise or equitise its monthly cash payments in the short term with the intention of alleviating the negative cashflow impacts for its royalty partners during this time of unprecedented financial stress.‚ÄĚ
Cash received in April was ¬£600,000 and is expected to continue at this level through to end of June.
While April‚Äôs cash received is below March‚Äôs ¬£1m, the reduction has not been waived or ‚Äúlost by Duke‚ÄĚ. It is expected to be made up in subsequent periods once the pandemic stabilises and trading improves.
Following cuts, Duke‚Äôs operating cost is now running at ¬£1.8m per annum, ¬£150,000 per month.
Duke‚Äôs cash receipts in its Q1 ending 30th¬†June should exceed its operating cost for the whole year.
Liquidity remains strong with cash of ¬£3m and additional liquidity of ¬£18m.
It has decided to conserve cash given the current uncertainty and for the time being, intends to pay the dividend for Q1 through a scrip dividend rather than cash. It intends to revert to the payment of cash dividends when a more normalised trading environment returns.
Neil Johnson, CEO of Duke Royalty, said:
“While we face an unexpected business environment, royalty companies are designed to withstand downside economic shocks. Duke Royalty benefits from both low operating costs and senior security in our investments, while limiting the downside adjustment in any given year.¬†
“Our short-term priority is to support our royalty partners in order to protect our portfolio, while helping the long-term future of each company. Like most lenders in the market, we have made our contribution towards the fight against this virus by way of restructuring some of the repayment terms where necessary. I would like to take this opportunity to thank our royalty partners, some of which have also altered their business to contribute in the quest to overcome Covid-19, for the resilience they have shown in recent weeks.¬†
“Our commitment to our shareholders is also steadfast. Currently, the Board believes cash conservation is prudent, which has been the response of most businesses during this pandemic. However, rewarding shareholders through dividends is a priority, so we will continue the dividend through a scrip arrangement.¬†
“Given the strong financial performance we delivered ahead of the outbreak, I believe we will move out of this extraordinary time having demonstrated the resilience of our model, the benefits of our capital over short dated bank debt, and the strength of our support for our partners in overcoming this unique trading period.”¬†