Duke Royalty: Trading Update and Reinstatement of Cash Dividend
Trading and Portfolio Update and Reinstatement of Cash Dividend
Duke Royalty Limited (AIM: DUKE), a provider of capital solutions to a diversified range of profitable and long-established businesses in Europe and abroad, is pleased to provide a trading and portfolio update for its third financial quarter, ending 31 December 2020 (“Q3 FY21”).
Due to the operational progress made and actions taken to support cash, Duke Royalty is also pleased to announce that it intends to revert to a cash dividend of 0.5p per share for the upcoming quarter, Q3 FY21. The Board will provide further updates in relation to its dividend in December, in line with the usual schedule.
Trading Update Highlights
- Cash revenue for Q3 FY21, being cash distributions from its Royalty Partners and cash gains from sales of equity assets, is anticipated to increase to £2.5m based on current trading, compared to £2.0m in Q1 FY21 and £2.4 m in Q2 FY21.
- Of Duke’s 12 Royalty Partners at the start of the pandemic, seven of them maintained their monthly cash payments to Duke throughout. In addition, the Company delivered additional capital to its Royalty Partners which experienced growth opportunities during the pandemic. Furthermore, Duke’s first partner exit was achieved with a successful cash-on-cash return in excess of 1.5x.
- Four out of the five royalty partners which entered into forbearance agreements with Duke at the start of the pandemic have now come out of forbearance. Duke now has long term exposure to the growth fundamentals of three such royalty partners through equity positions of c. 30% in lieu of forgone cash revenues (plus subsequent reinstatement of royalty payments), while forgone payments from another royalty partner are being accrued with interest. A full portfolio update can be found below.
- Assisted by the payment of a scrip dividend for the two previous quarters, the Company’s cash position has increased by 122% to £6.0m as at 30 October 2020, from £2.7m in April 2020. Currently, the Company’s approximate net debt position is £14.0m.
- Given the Company’s progress made during F2021, the Board intends a return to a cash dividend of 0.5p per share for Q3 FY21, at the usual dividend announcement timing in December.
- Duke continues to trade at a substantial discount to its underlying net asset value per share which stood at approximately 30.9p per share at the Company’s financial year end of 31 March 2020.
- With substantial capital to deploy, the Company has actively resumed business development activities in the UK, Ireland and North America. The outlook, while still challenging, is expected to open up greater investment opportunities for the Company and the SME finance sector as a whole. The Company believes the current climate makes the key advantages of Duke’s long-term capital more appealing to business owners wanting to retain control of their business.
Duke Royalty CEO Neil Johnson said:
“I am pleased to announce our intention to return to cash dividends for the current quarter, due to the expected 25% and 4% increase in the Company’s cash revenue in comparison to Q1 and Q2 FY21 respectively. This decision reflects the increased stability that we have observed across the portfolio. I thank our shareholders for their understanding of our decision to switch to a scrip dividend while we worked diligently to ensure we preserved long-term shareholder value.
“While the short term global economic outlook is still unsettled, many of our portfolio companies have already demonstrated their resilience in the current environment, with some of our partners experiencing growth opportunities which we have supported with additional investment. Of course, this has not been the case for every Royalty Partner and we entered into forbearance agreements where necessary. I am pleased to note that the short term reduction in cash revenue has, in most cases, been converted into long-term meaningful equity positions or deferment of cash payments. This provides our shareholders with exposure to equity returns from these mature businesses, in addition to the royalty payments enjoyed by Duke’s shareholders prior to the Covid-19 pandemic. The Company can now send a strong signal to shareholders that the downside protection of the royalty model performs during the most stressed of business conditions, and that Duke is well positioned to tackle any future challenges.
“Moreover, as the traditional debt channels tighten and access to equity also becomes increasingly challenging, the need for innovative and flexible forms of financing such as Duke’s has never been greater. Therefore, we are starting to see what we believe will be a significant opportunity for Duke to grow our portfolio of private, profitable businesses, and our growing pipeline of new opportunities reflects that.”
As previously reported, the Company entered into forbearance agreements in Q1 FY21 with five of its Royalty Partners which had been most affected by the Covid-19 pandemic. This was designed to give them financial flexibility to manage their way through the challenges and volatility that they were experiencing. Duke is pleased to report that while the pandemic affected all royalty partners in some way, most were positioned to take swift action, allowing royalties to continue to be paid to Duke on a monthly basis.
For those Royalty Partners whose revenues were significantly affected from March 2020, Duke Royalty has been working with the business owners to find solutions to ensure their long-term viability. Due to the secured nature of our agreements, and preferred status as regards equity, the Company was able to take action to preserve shareholder value for the long term in the form of equitisation, capitalisation, or deferral of the short term cash payments which were forgone. Duke’s goal was to support good business owners who, through no fault of their own, faced an unprecedented shock to their business. Acting to preserve the companies as going concerns instead of trying to enforce Duke’s security has meant that, for the most part, the companies have been able to trade out of the pandemic months while Duke Royalty has maintained or increased its potential IRR on each investment. Finally, Duke has supported those royalty partners who have been able to take advantage of their relative strength to deploy more capital and acquire other companies on an accretive basis.
With cash payments being made from the majority of its Royalty Partners, the Directors have increasing confidence in the cash revenue outlook for the full year and beyond. However, the Board recognises that significant uncertainties remain in relation to the impact and/or resolution of the additional Covid-19 lockdowns and the economic outlook post the virus.
United Glass Group (“UGG”):
UGG is one of the UK’s leading independent glass merchants and processors. Its facilities were ordered to close between April and June except for essential workers, and the lockdown severely affected short-term revenues of the Group. A forbearance agreement was signed in May 2020 with Duke agreeing to a reduced monthly payment and to equitise the unpaid cash balance for the 5-month period ending 30 September 2020 in exchange for a direct shareholding in UGG of 30%.
During this period Duke worked with UGG to implement a cost reduction plan in light of the anticipated lower trading volumes, and also used this opportunity to strengthen UGG’s balance sheet by reducing its debt obligations and injecting additional equity into the business.
Monthly financial and operational results since reopening have exceeded the company’s profitability expectations, leading to a more normalised level of liquidity headroom in the business. As a result of this performance, the business has resumed its cash payments to Duke as at 1 October 2020.
Step Investments Limited (“Step”):
Step is an Irish based holding company for a range of interests in the advertising, private education and hospitality sectors. From April 2020, there was an immediate impact to Step’s cinema advertising subsidiary (which includes Pearl and Dean) as UK and Irish cinemas were forced to close.
As a result of the significant impact that Covid-19 had on this sector, Duke entered into a forbearance agreement with Step in April 2020. As part of that agreement, Duke agreed to equitise their monthly payments from April until September 2020 which, together with the below proposed new investment, will result in Duke owning a 30% direct equity stake in Step.
Step’s private education subsidiary, City Education Group (“CEG”) owns and manages four different private educational facilities throughout Dublin, including the highly regarded Ashfield College. CEG is a profitable and growing company that has managed its business efficiently through the Covid-19 pandemic and fits well with Duke’s investment criteria.
Duke is currently in the final stages of closing an additional €2.25m investment into Step, which will be used to increase Step’s shareholding from 38% to 85% in CEG from selling shareholders. Duke’s follow-on investment into Step is expected to be concluded by the end of 2020 and, upon completion, Step will recommence the monthly cash payments including all amounts due from October 2020.
Trimite Global Coatings (“Trimite”):
Trimite is a 70-year-old UK private company that formulates and manufactures high performance and technologically superior coatings and paints for speciality industrial markets. Its facilities were ordered to close between April and June except for essential workers, and the lockdown severely affected its short term revenues. A forbearance agreement was signed for April to September 2020 which involved Trimite paying a reduced monthly cash payment to Duke with the balance of the monthly payment being equitised. This has resulted in Duke owning a 30% equity interest in Trimite.
In consultation with Duke, necessary cost reduction plans were implemented to adjust to the post-Covid-19 expected trading, although it is pleasing to note that both revenue and EBITDA have exceeded expectations since July and a liquidity buffer has been building in the business. In conjunction with its commitment to cost reduction and improved operations, a new group Managing Director and Finance Director have been appointed with significant expertise in industrial coatings and leadership in similar businesses.
The results of the post-Covid-19 plans of Trimite will be known over the coming months and, starting November 2020, Duke’s monthly payments will be a mixture of cash with the non-cash portion to be capitalised. We expect Trimite’s operational improvements to be generally complete by the end of March 2021 when there will be a review of Trimite’s ability to resume full cash payments.
Temarca B.V. (“Temarca”):
Temarca has been operating multi-day riverboat cruises along the Rhine and Danube rivers since 1997. In April 2020, virtually all European river cruising voyages were cancelled in the face of the first wave of the Covid-19 pandemic. As senior secured creditor, Duke immediately agreed to defer all monthly payments from April 2020 in order to give Temarca as much financial flexibility as possible to manage their way through their financial challenges. Since the late summer, the European river cruise industry had opened up again, including Temarca, but on a significantly reduced scale and the current European second wave of the Covid-19 pandemic has now halted all cruises once again.
In consultation with Temarca’s owners, it became clear that the best solution for Duke was to take direct ownership of Temarca’s three wholly owned river cruise vessels where Duke holds first ranking mortgages. The intention is Duke will lease its three boats back into the European river cruising market in the future, as a ship owner, but will not look to directly manage the vessels itself.
With direct ownership of the three vessels, Duke is positioned to generate the maximum yield possible from its assets as and when demand for European cruising re-emerges. It has also underpinned Duke’s security position. Although Duke remains cautious of the short term outlook for the sector and therefore for the short term yield expectations from this investment, management believes that, as a result of its actions, Duke is in a strong position to benefit as and when the macro conditions improve for the sector.
Interhealth Canada (“Interhealth”):
Interhealth is a leading healthcare organisation specialising in the development, commissioning and management of healthcare facilities and services using a public-private partnership model. The Covid-19 pandemic negatively impacted Interhealth, as it led to delays in the opening of hospitals in Poland and Riyadh and disrupted hospital operations across the group.
Duke worked with the company to structure a forbearance agreement which has resulted in a reduced monthly cash payment being made to Duke since April 2020 with the majority of the monthly payments being accrued with interest. Interhealth is currently in advanced discussions with a number of parties for financing solutions to complete the King Saud University Endowment hospital development in Riyadh (“KSUE”) and it is pleasing to note that its Polish hospital has now successfully opened. Duke’s secured loan sits at a Group holding company level and the existing forbearance terms have been extended as Interhealth completes the KSUE hospital financing and benefits from a more normalised operational environment across the Group.
Update on additional portfolio companies:
MRDB Holdings Limited (“Miriad”):
As the UK’s leading RV and caravan parts distributor, Miriad has benefitted from the changing behaviour of UK citizens who have, in increasing numbers, decided or have been required to stay in the UK for their holidays. After an initial drop in business volumes in April and May, it is pleasing to note that both revenue and EBITDA have both bounced back strongly since June.
Miriad continues to execute its traditional B2B business model as well as opportunistically taking advantage of the increased demand for domestic travel by expanding its B2C online presence through its own online portal, ecommerce platforms, and digital marketing. Duke is expecting a strong close to the year and Miriad continues to trade in line with its pre-Covid-19 budgets and benefits from a strong underlying liquidity position.
Duke’s payments have been unaffected during FY2021 and the outlook remains positive for Miriad.
Welltel Ireland Limited (Welltel):
Welltel, an Irish-based business communications company and one of the largest independent voice and data providers in Ireland, has continued to trade robustly through 2020, despite the adverse impact that Covid-19 has had on some of its clients’ large infrastructure upgrade projects. The Company’s core business, including recurring network and telecommunications services, have underpinned the resilient performance of Welltel as the Covid-19 pandemic has seen increased investment and focus by businesses on their telecommunications and internet infrastructure.
Welltel’s business model of growth by acquisition continues, and the pandemic has created opportunistic bolt-on acquisitions from companies without a complete solution for their customers. Working from a position of strength, Welltel has completed two accretive acquisitions this year: Novi in June, followed by Intellicom in August, utilising Duke’s flexible capital to do so. To date, Welltel has used Duke’s capital to acquire five businesses, enabling it to offer an integrated solution for its customers, which has led to a market leading position and increased profitability.
Duke’s payments have been unaffected during FY2021 and the outlook remains positive for Welltel with organic and further non-organic growth opportunities.
Lynx Equity UK (“Lynx UK”):
Lynx UK’s portfolio consists of six underlying companies of which three are based in the UK and three in Denmark. This geographic and operational diversity gave stability to the company during the early days of the pandemic. Lynx has focused on managing the liquidity in its portfolio businesses over the past 6 months and combined with swift actions from its portfolio companies at the beginning of the pandemic, there has been steady performance, allowing Lynx UK to meet all obligations.
Duke’s payments from Lynx have been unaffected during FY2021 and while Lynx UK continues to manage the effect of Covid-19 related issues within some of its operating subsidiaries, the strong level of diversification of the business means that the outlook remains positive for Lynx UK.
BHPC Limited (“BHP”):
BHP, an Irish brokerage specialising in the niche not-for-profit insurance space, with small operations in other specialty insurance areas, has continued to perform resiliently throughout 2020. While Covid-19 adversely impacted some of its business lines, including charities and events, other areas such as social housing, where BHP enjoys dominant market share across Ireland, have continued to grow year-on-year. As a result, BHP is expected to achieve full-year profitability roughly in-line with its pre-Covid-19 budget.
Duke’s payments from BHP have been unaffected during FY2021 and the outlook remains positive for BHP.
Bakhchysarai (Ireland) Limited (“BIL”):
BIL, an investment platform formed in order to build a diversified portfolio of strategic and synergistic investments within the Irish/UK recruitment sector, has benefited through 2020 from its acquisition of PharmEng Limited (“PEG”) in January 2020. PEG is a contract recruitment focused company, operating in business sectors such as pharmaceutical and Ireland’s healthcare sector, that have performed resiliently through the pandemic and resultant lockdown periods. Brightwater, BIL’s other subsidiary that generates the bulk of its revenue from permanent placement, has been more affected by the increased uncertainty in the last 6 months, but has focused on cutting costs and maintaining a positive contribution to the Group.
Duke’s payments from BIL have been unaffected during FY2021 and while headwinds remain in the permanent side of the recruitment sector in general, BIL anticipates being able to trade through this challenging period and maintain its monthly cash payments to Duke.
Berkeley Recruitment (Group) Limited (“Berkeley”):
Berkeley, which provides recruitment and consulting services to a long-standing list of blue-chip clients across Ireland, has continued to perform resiliently during the pandemic with contract revenue well supported by its business and technology divisions in particular. The business reacted quickly to lockdown restrictions, focusing on enabling remote working and keeping a tight control on overhead costs. The business is performing ahead of last year and budget expectations.
Duke’s payments from Berkeley have been unaffected during FY2021 and the outlook remains positive for the company.
Xtremepush Limited (“Xtremepush”):
Xtremepush’s business has benefitted from Covid-19, as its online technology platform helps e-commerce and online retailers attract and retain customers. With the market expanding quickly, Xtremepush’s business plan of growth through acquisitions and US expansion was accelerated with substantial interest in the company from traditional venture debt and equity. While Duke’s capital has been used to fund two previous strategic acquisitions, in consultation with Xtremepush it was agreed the best course of action was to re-finance Duke’s £2.0 million investment as part of a larger transaction.
The transaction further validates its funding model for both Duke’s investors and its Royalty Partners and is Duke’s first exit. The investment’s IRR was in excess of 22%, with a cash-on-cash return in excess of 1.5x. Duke retains its warrant over 3% of Xtremepush’s current share capital, representing further potential upside in the future.
Business Development and Outlook:
The Duke team has worked hard to manage the Company and its partners through the difficulties presented by the pandemic over the past six months and management is confident that the flexibility shown to its royalty partners has demonstrated that Duke is a supportive, long-term capital partner to SMEs.
While the economic outlook is still unsettled, the Company believes business owners place more value on long-term capital partners like Duke Royalty when there is short term uncertainty. This provides Duke with a significant opportunity to raise further awareness of the benefits of revenue-linked finance and to grow its portfolio of long-tenured businesses with a track record of profitability and ability to withstand economic cycles.
Accordingly, Duke Royalty has been evaluating a significant number of potential investment opportunities to grow and further diversify its portfolio further for the benefit of its shareholders. Maintaining discipline regarding its criteria is important as Duke’s capital is not short-term or rescue financing. However, management has continued to identify situations (new and existing royalty partner opportunities) where royalty capital works, such as management buy-outs, acquisition capital, and shareholder and/or debt restructuring.
The Board of Duke Royalty believes that the long-term effects of the pandemic will prove to accelerate the growth of the SME finance sector in the UK and Europe, and many firms, including PWC, share that view in recent publications. Additionally, the Board believes that as long-term, passive capital partners, which do not force exits upon business owners, royalty finance will be more desirable for SMEs in a post-Covid-19 world. As the market leader in the UK and Europe, Duke Royalty is optimistic about the future of the business given the resilience demonstrated by the Company and its Royalty Partners through the economic crisis and Covid-19 pandemic of 2020.
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