Duke Royalty (LON: DUKE) is unique in the UK, although its royalty model is well known in North America. Duke’s royalty income-based model provides cash generation and an attractive yield.

Duke has the finance to grow the business and companies are becoming more aware of the attractions of royalty-based finance rather than bringing in private equity backers or floating on the stockmarket.

An interim dividend of 0.75p a share has been declared and the shares go ex-dividend on 24 December. This is for the second quarter and first quarter dividend was also 0.75p a share – it was 0.7p a share for each of the quarters in the previous financial year.

This means that this year’s full year dividend could be 2.95p a share. That provides a 6.3% yield at the current share price of 47.7p.

Business

Guernsey-registered Duke was known as Praetorian Resources prior to June 2015. The mining investments were sold, and investing policy changed to providing capital to a range of businesses. In return Duke gets a royalty stream that can generate cash flow to pay dividends.

Duke provides an injection of secured capital for a business over a period that tends to be between 25 and 40 years. This investment generates royalty revenues, which are related to the revenue performance of the business. The borrowing company can buy itself out of the agreement but there are penalties.

The long-term nature of this investment means that Duke has to take its time and carefully research the business. It must be comfortable that the investee company can continue to generate growing revenues over many years. An established track record of more than 10 years and a strong management team is important.

Duke focuses on the hospitality, industrial, healthcare, technology, media and utility sectors. The deal size tends to be between £5m and £20m.

Portfolio

The first investment was made in 2017. The portfolio has been built up since then.

At the beginning of 2019, Duke bought the only major UK rival Capital Step. That added six more investee companies, taking the total to eleven. There are currently 12 investments in the portfolio according to the website (www.dukeroyalty.com).

The portfolio includes cinema advertising group Pearl & Dean, which also includes Ireland-based Wide Eye Media. This has been part of the portfolio since June 2018. Other investee companies include recreational vehicle parts wholesaler Miriad Products, glass merchant and processor United Glass and Dublin-based marketing and analytics platform Xtremepush.

The portfolio was valued at £72.3m, with a further £11.1m in loans, at the end of September 2019. They generated £5m in royalty and interest payments in the six month period, while overheads and interest charges were around £2m.

Since then, Duke has made a follow-on investment of £2m in Lynx Equity to finance the acquisition of steel staircases manufacturer Sundby Trapper.

Finance

Although Duke initially raised £200,000 at 60p a share in September 2015, the first significant fundraising was £15m at 40p a share in 2017. That is a big discount to the previous placing price, but it is a much larger amount of money.

Since then, there have been further share issues at 40p a share and 44p a share. The latest placing and open offer raised £17.5m at 44p a share.

Duke has paid down its revolving credit facility of £11.65m, that came with Capital Step, and replaced it with a £30m credit facility provided by Honeycomb Investment Trust, which has an interest charge of UK LIBOR plus 7.25 percentage points (compared with +9.5 percentage points previously).

Future

Duke has the cash it requires to make further investments. There should be plenty of opportunities, but it is important to be careful in the choice of investee company. This is why it can take time to agree new investments.

Net assets are £72.8m, compared with the current market value of £113.8m.

The yield of more than 6% is a particular attraction for investors.