Duke Royalty; uplift to royalty income

Duke Royalty (DUKE.L, Market Cap £92m, 46.75, 4.3% of JIC Portfolio and 10.1% of JIC Top 10)

Modification of Terms with Recently Acquired Royalty Partners

Conclusion: This is good news for shareholders. Remember Duke pays out its net royalty income each year as dividends, so this should lead to higher dividends than previously expected. As Neil Johnson points out, there should be further news as it deploys additional capital via follow on investments with the acquired royalty partners. On current forecasts, the shares are on a prospective dividend yield of 6.1% for the year just ended to 31st March. The forecast yield for the current year ending March 2020 is 7.4%, but there should be upgrades to that.  The share price has started to move up steadily; 7.0% this year and 10.0% on my purchase price but still looks cheap to me. As it makes further royalty investments the quality of the business will improve as it diversifies geographically and by industry. Hopefully, that should lead to a re-rating of the company. In the meantime, I’m being paid to wait with a handsome dividend income. Happy Holder of a 4.3% holding.   

Duke has reached agreements with three royalty partners, acquired with its acquisition of Capital Step in February.

Without going into the details, it is expected to increase gross revenues to Duke by at least £3.7m in aggregate over the next five years. In one of the three cases, Pearl & Dean Group, the royalty agreement has been extended from 2024 to “in perpetuity”. This means that the actual revenue uplift could exceed the £3.7m, depending on future revenue growth of the Pearl & Dean Group.

These changes lead to more than a 25% increase in the expected revenues per year from Capital Step’s portfolio, with no need for additional overheads. Also, these “modifications” are excluded from “performance-related milestones for the period ending 21st March 2021”, which the Capital Step portfolio needs to deliver to receive a deferred acquisition payment from Duke.

Neil Johnson, CEO of Duke Royalty, said:
We are pleased to agree these modifications, which means that our royalty partners can increase short term cash flow and Duke can maximise near term revenues.  We recognised the strength and credit quality of the acquired royalty partners and the Board identified this as a way of unlocking value of the Capital Step royalty agreements for Duke Royalty shareholders.  We are also looking at the opportunity to deploy further capital at accretive returns via follow-on investments into the acquired royalty partners and look forward to updating the market in due course.”

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