Duke Royalty: Trading Update
Duke Royalty, a provider of alternative capital solutions to a diversified range of profitable and long-established businesses in Europe and abroad, provides the following trading update.
Further to our trading update on 2 April 2020, Duke has been working closely with its royalty partners to understand the impact of the Covid-19 pandemic on their businesses and to ensure that they are provided with the necessary support to trade through this challenging period. By design, Duke’s long-term capital is structured to be aligned with its royalty partners, their owners and managers through the ups and downs of economic cycles.
Whilst impacts to Duke’s portfolio are inevitable during the pandemic, management are pleased with the ongoing resilience demonstrated by the Group’s portfolio as a whole. Through its diversified portfolio, Duke naturally has exposure to a range of sectors, some of which are impacted to a greater extent by Covid than others, such as hospitality & leisure. In certain situations where Covid-19 has had the greatest impact, Duke has elected 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.
Nevertheless, cash revenue received in April totalled over £600,000 and this level of monthly cash revenue is expected to be maintained through the quarter ended 30 June 2020 (“Q1 2020”). While this is below the £1 million cash receipts of March, it should be noted that the reduction has not been waived or lost by Duke, rather it has resulted from the restructuring detailed above with the anticipation that the shortfall will be made up in subsequent periods as the pandemic stabilises and trading improves.
Based on the proactive cost cutting measures that were put in place by Duke in March, the Company estimates that its annual operating cost base is currently running at approximately £1.8 million. Therefore, it is pleasing to note that the Company’s Q1 2020 cash receipts will likely exceed its entire FY 2021 annual operating cost budget, thereby highlighting the high margin and cash generative nature of Duke’s business model.
The Company’s liquidity position also remains strong, with cash on hand of over £3 million and additional liquidity of approximately £18 million via its revolving line of credit with Honeycomb Investment Trust. Duke anticipates making additional investments into its existing royalty partners over the coming months, both to provide financial support and to provide acquisition capital in certain circumstances. While it is too early to make any definite forecasts, Duke remains cautiously optimistic that its royalty partners will be able to successfully navigate through this unique period of uncertainty and Duke looks forward to be able to report on a more normalised trading environment in due course.
In light of the lower cash receipts expected in the short term, and the likely follow-on investments that Duke intends to make into its existing royalty partners in the coming months, the Company feels it would be prudent to retain cash as much as possible to support its portfolio. To that effect, for the upcoming June quarter, Duke will elect to pay shareholders a scrip dividend instead of its normal cash dividend, with the exact quantum to be announced in the normal timing cycle of mid-June. Since 2017, Duke has paid out more than £12.7 million in cash dividends and intends to revert to the payment of cash dividends when a more normalised trading environment returns. Further timings and details relating to the scrip dividend will be provided in the June announcement.
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.”
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