Good morning!

Some early comments on Duke Royalty (LON:DUKE), which made a major announcement on Friday evening after the market closed.


Duke Royalty (LON:DUKE)

  • Share price: 47.8p (+0.4%)
  • No. of shares: 96.9 million (before the fundraising)
  • Market cap: £46 million

Fundraising to raise £44 million and notice of EGM

(Please note that I currently own DUKE shares.)

I covered this investment vehicle for the first time last month in response to reader requests, and then subsequently bought shares in it.

It claims to be the first non-resource royalty company to be publicly-listed in the UK.

Royalty investing is a type of mezzanine finance. It is more secure than equity investing, but less secure than traditional fixed income.

The concept makes sense to me and looks attractive as a potential compounder of returns, so I've taken a position. I could be wrong - as usual, remember that everything I say is just my opinion! It's not a recommendation.

The News

A key source of Duke's risk has been its lack of diversification. According to my previous calculations, 50% of its capital was scheduled for just two of its investments. 90% was scheduled for its top four.

A vehicle like this should not be a bet on just a handful of investees. It should exploit a good idea many times and be able to survive a few of its investments going bad.

To diversify quickly, it needs more capital. Therefore, it is now seeking to raise £44 million (gross) through the issue of 100 million new shares at 44p. This is in line with its strategy:

...to continue to build a diversified portfolio of royalty streams from companies ("Royalty Partners"), increasing its short to mid-term dividend yield and de-risking its business.

In previous rounds of funding, it raised £35 million at 40p.

My view

I view it as positive that the next round of funding is planned to go ahead at a higher share price compared to the previous rounds, and at a significant premium to the company's book value.

This bolsters my own suspicion that Duke will prove to be worth more than its book value, with the fundraising also of course having the practical consequence of massively increasing its firepower (more than doubling it).

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