Small Cap Value Report (Mon 24 Sep 2018) - DUKE, MGR, XLM, XPD

Monday, Sep 24 2018 by

Good morning!

We have plenty of candidates for coverage today.

In the end I covered:



Duke Royalty (LON:DUKE)

  • Share price: 44.5p (-3%)
  • No. of shares: 198 million
  • Market cap: £88 million

Final Results and Notice of AGM

(Please note that I currently hold DUKE shares.)

Duke is "the first UK quoted non-resource royalty investment company", i.e. it's an unusual type of investment vehicle. It provides financing to small businesses and in return it receives a long-term income stream that varies in accordance with the revenues of the underlying businesses.

This is "mezzanine finance" - riskier than lending, less risky than buying an equity interest. I've discussed the business model plenty of times before so if you're interested, I'd invite you to check out the archives!

These results are for the year ending March 2018. They are pretty much irrelevant in my view, given how much has happened at Duke since then.

Some investors might be disappointed with the loss announced today but I agree with the company's view that its accounting treatment is a little bit harsh.

The underlying business model is simple: Duke puts big chunks of money into businesses and gets a strong, variable cash yield in return (e.g. starting at 13%).

Cash flow is then used to pay dividends or reinvest. Personally, I would be happy if the company would reinvest as much as possible, to enable it to compound and diversify as quickly as possible.

Plenty of investors do want income, however. The quarterly dividend at Duke is now 0.7p and the company's intention is that this will be "stable and increasing". In FY 2018, Duke achieved slightly better than its initial target of a 5% yield (2p) on the 40p placing price.

The real test will be whether the company can achieve the promised cash flows in the years ahead. It's still too soon to say whether the company can achieve its goals.

Keeping costs at a reasonable level will also be important. Duke is headquartered in Guernsey and has very few employees, so it should be possible to contain costs in such a way that shareholder returns…

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All my own views. I am not regulated by the FSA. No advice.

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Duke Royalty Limited is a Guernsey-based diversified royalty investment company. The Company specializes in diversified royalty financing and provides alternative capital solutions to a diversified range of businesses in Europe and abroad. The Company’s investment policy is to invest in, without limitation and restrictions (including geographical restrictions), long-term, revenue-based royalties in private and/or public companies, and or other alternative asset classes and/or financing instruments from time to time that bear similar risk and return characteristics. The Company provides financing solutions to private companies that are in need of capital but whose owners wish to maintain equity control of their business. It provides capital to companies in exchange for rights to a small percentage of future revenues. more »

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Miton Group plc, formerly MAM Funds plc, is an investment management company. The Company provides fund management services. Its funds are invested in a range of asset classes under various investment mandates, including multi-asset, equity and portfolios of collective investment schemes. Its product range includes equities, such as CF Miton UK Multi Cap Income Fund and FP Miton Income Fund; multi-assets, such as CF Miton Cautious Multi Asset Fund and PFS Miton Cautious Monthly Income Fund; fund of investment trusts, such as CF Miton Worldwide Opportunities Fund, and closed-end funds, such as The Diverse Income Trust plc and Miton Global Opportunities plc. Its subsidiaries include Miton Group Service Company Limited, which is a holding company and central services provider; PSigma Asset Management Holdings Limited, which is an intermediate holding company; Miton (Hong Kong) Limited, which is a marketing company, and Miton ESOP Trustee Limited, which is a trustee company. more »

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XLMedia PLC is the United Kingdom-based online performance marketing company. The Company focuses on paying users from multiple online and mobile channels and directs them to online businesses who, in turn, convert such traffic into paying customers. The Company's segments include Publishing, Media and Partners Network. The Company owns over 2,000 informational Websites in approximately 20 languages. Its Media division acquires online and mobile advertising targeted at online traffic with the objective of directing it to its customers. It buys advertising space on search engines, Websites, mobile and social networks and places advertisement referring users to its customers Websites or to its own Websites. It manages marketing partners, whose role is to direct online traffic to its customers. Its partner program enables affiliates to have a single point of contact for directing traffic. more »

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  Is LON:DUKE fundamentally strong or weak? Find out More »

30 Comments on this Article show/hide all

MBFP 24th Sep '18 11 of 30

Morning Graham,
Kape interims out this morning.
Interested in your view please.


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fredericktug 24th Sep '18 12 of 30

request for £GMAA? Interims today, market doesn't seem to like. I think they presented at Mello Derby this year but must have underwhelmed me! Price fall has triggered an alert though!

Mind you I had alerts for Thomas Cook (LON:TCG), Vertu Motors (LON:VTU) and Parity (LON:PTY) (not holding any) which have also buzzed this morning. Care needed or I'll have multiple knife wounds, all in the hand!

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rwalford 24th Sep '18 13 of 30

I would also be interested in your views on Spectra Systems (LON:SPSY) and Kape Technologies (LON:KAPE) - both look to have announced (to my untutored eye) excellent results.

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crazycoops 24th Sep '18 14 of 30

Hi Graham

It would be great if you could provide a follow up comment on Duke Royalty (LON:DUKE) finals (for y/e 31 March). Personally, I feel these results are published so late that subsequent events probably means there is little to add to your previous coverage but nonetheless, I always value your views on financial companies.

I also have an interest in Spectra Systems (LON:SPSY) and Kape Technologies (LON:KAPE) which both published interim results today, if you have the time and inclination.


Blog: Share Knowledge
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jimmygee 24th Sep '18 15 of 30

xpediator please :)

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andrea34l 24th Sep '18 16 of 30

Hi Graham, welcome back, hope you had a good holiday.

I'd be interested in the following please:

  • Miton (LON:MGR) - I hold (largest holding as of today), I think the results looks smashing, on Stockopedia comparisons I think they look the best in sector too... but maybe you have another view?
  • Spectra Systems (LON:SPSY) - I also hold. The price goes up and down like a yo-yo for some reason. As far as I recall, the results have looked good for some time, and these are no exception. I would have thought their products of speciality compounds as well as systems for bank note security would be invaluable.
  • Xpediator (LON:XPD) - the progress looks good... but, to me, the flat "adjusted eps growth" seems rather disappointing, as does the Stockopedia stats page. I held in the past, but not at the mo.
  • Pennant International (LON:PEN) - these results look very good, with good revenue and profit increases... though the order book is down a bit and the outlook is only in-line
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cjg 24th Sep '18 17 of 30

Can i add requests pls for Miton Miton (LON:MGR) and Spectra Spectra Systems (LON:SPSY)

Miton's results look very solid with good fund performance driving strong infows into funds under management and new broker coverage by Liberium showing increases in forecasts.

As ever the biggest risk is a market downturn which directly impacts assets value of assets under management but in terms of the controllables Miton seems to be in top gear.

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tomps3 24th Sep '18 18 of 30

Miton (MGR). Good H1 results today, Assets under Management +30.7%, adj PTP +51.7% and net cash up +15.4%.

Here's David Barron, CEO talking through the results, and how they've achieved them.

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grb 24th Sep '18 19 of 30

I'd be interested in your thoughts on OPG Power Ventures (LON:OPG). This is the worst-performing share that I still hold - and the market clearly doesn't like today's results as it's down another 30% as I write. More fool me!
However, I think it might be the start of a turnaround, though. They've "deconsolidated" their loss-making plant at Gujarat, creating a £100m loss for the year. But this has also reduced to debt to less than £100m - which is still more than twice the mcap but 30% of what it was a year ago.
They're left with a profitable plant at Chennai and a solar project that's not ramped up yet, so I think the prospects from here on are rather better.

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andrea34l 24th Sep '18 20 of 30

In reply to post #401334

Hi grb,

OPG Power Ventures (LON:OPG) were my worst performing share too... and I've dumped them today, I think these results are appalling and I think they have been promising more progress than this for some time.

I hope I am wrong if you continue holding; this was a small, high-risk/play holding for me.


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gus 1065 24th Sep '18 21 of 30

In reply to post #401304

Hi andrea34l.

I agree the Miton (LON:MGR) result look good and have finally taken a position after tracking for a while - with hindsight I should have done it a few months ago when it first piqued my interest. In terms of being “best in sector”, I also hold Polar Capital Holdings (LON:POLR) and possibly rate that at least as highly as Miton. I’d welcome any views on either/both.

Comparison here:-


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DJCP 24th Sep '18 22 of 30


I had estimated Duke Royalty (LON:DUKE) PBT to be near break-even, so was surprised at the £860k loss (v £1.4m loss in 2017), until I noted the 'new IFRS 9 accounting standard for financial instruments' statement. I wasn't as far out as the April 18 Midas article that predicted a £500k profit ! lol

I've yet to fully read the results, but as you mention, the next H1 and YE should be much more informative, and in the meantime, two and four more divis during those periods :o)

Some additional notes
1) Royalties (Sept 18 on) are £450k per month.
2) The 0.7p divi paid in July and upcoming 0.7p in October are based upon 97m and 198m shares respectively, so they haven't reduced the divi amount, even though shares in issue has doubled - I can understand this is effectively being paid from cash raised by equity issued - £1.4m quarterly divi payment v £1.35m quarterly Royalty income
3) I'd calculated expenses at £100k pm, but will now revise to £200k and see what my estimates look like - A brief summary below of my H1 & YE estimates.
4) Their cash balance at H1 (Sept 18) should be £32m, so enough to fund 3 Royalties (if equal to largest £10m one so far)
5) Each £10m Royalty, increases revenue by approx. £100k p.m. starting in the month following completion, so if the £30m cash is 'invested' during H2 (Oct 18-Mar 19), they'll finish the year with £750k p.m. Royalty income.

H1 (To Sept 18) / YE estimate:
Royalty Income £2.0m / £5.9m
Expenses £1.2m / £2.4m
Basic Profit £0.8m / £3.5m

Cash Opening Balance £3.2m / £3.2m
Net from Equity Issue £42m / £42m
Royalty Investments (+ 6.5m included in this Y/E cashflow) £12.0m / £42.0m
Divis paid £1.2m / £4.0m
Cash Closing Balance £32.8m / £2.7m

(Disc. If you hadn't already guessed, I've a holding in Duke Royalty (LON:DUKE) )

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john652 24th Sep '18 23 of 30

Good XLMedia (LON:XLM) results webcast/presentation here, explains the issues that hit them before and ceo upbeat about future, worth 20 mins

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gsbmba99 24th Sep '18 24 of 30

There are some slightly unusual compensation arrangements at Duke Royalty (LON:DUKE) that occur through the service companies to whom they outsource a significant amount of the work. The service companies are owned (at least in part) by Neil Johnson (Abingdon) and Charlie Cannon-Brookes (Arlington). The "finder's fees" due on the level of invested capital appear to have been exhausted with the issue of the 1.5m shares in aggregate. It would also appear that, in the interim, the dividend policy is linked, at least in part, to the continued waiver of service fees to which the service companies are entitled: "During the year, both Abingdon and Arlington agreed to voluntary reductions in their annual service fees in order for the Company to implement and sustain its quarterly dividend policy. Currently these reductions are still in place."

There's a Neil Johnson working for CIBC and advising Randgold Resources (LON:RRS) per today's merger RNS. I'm assuming that the Neil Johnson at Duke is a different person?

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Steves cups 24th Sep '18 25 of 30

For me Spectra Systems (LON:SPSY) looked like a golden share. But over the period I owned them the SP fluctuation was enormous from under 80p to north of 110p. Media announcements also seemed to be opaque and the same time after time. Finally the angst got to me and sold out above the current SP.
So holders beware the enormous spread and the illiquidity which leaves you at the mercy of market makers.

Still think that they need a big partner to capitalise on their IP

No longer held.

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crazycoops 24th Sep '18 26 of 30

Steve, I agree with you on the volatility and illiquidity at Spectra Systems (LON:SPSY) and the corporate governance isn’t the best either. This said, it has some interesting technology, good forward visibility of earnings, excellent quality characteristics and it pays a decent dividend. My own approach was to reduce the weighting to a level where I could ignore the volatility and allow the investment thesis to play out (or not of course). In my case, this level is around 2.5% of folio value. Large enough to make a difference if it comes good and for the dividend to be meaningful but small enough for it not to cause any long lasting portfolio damage if it goes wrong.

Blog: Share Knowledge
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herbie47 24th Sep '18 27 of 30

Xpediator (LON:XPD) my concern is Brexit, if no trade deal then maybe their lorries will be sitting in a park for days every time they cross the channel. Until Brexit is sorted out I won't be investing in this sector.

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ridavies 24th Sep '18 28 of 30

In reply to post #401194

I have been a shareholder for some considerable time and it has been one of my major shareholdings. It has moved swiftly from one of my more profitable holdings to my biggest loser this year. I think that we all need to get a bit more grown up about XLMedia (LON:XLM). I do not underestimate the commitment of the CEO. He has bought additional shares on a number of occasions, even when things were on th downward path - though that may tell us about how much he and his FID are in control of the company. Just to play back the recent history, he raised quite a lot of money when the SP was high, a tactic used by most companies. I think the SP at the time earlier this year was around £2. He set bonus targets for himself and his staff at close to £2. The SP slipped down towards 150p, even though the finals were good, and then the Trading update in mid year hit the SP dramatically. The reasoning given seemed inadequate at the time, and seems equally so today though Graham seems to buy it. All these things happening at once - Australia (how important can that have been to the finances?); regulatory issues coming earlier than expected (experts are paid to know about these things); dropping lower value business (I remember a respondent who had worked with XLM saying in one of reports earlier in the year that the model was never going to work long term, and that now seems to have come home to roost). Now OW is shooting out in all directions - financial in the US; bingo; expectations and preparations for the big bonanza in the US gambling (along with many others and that may take years as we all know). I have lost faith in the guy I am afraid. The only features I like about the business are the divis - but 6% vs a SP drop of 50% is a pretty poor deal, and the cash pile, but if that isnt spent wisely and productively then burning cash is taking us shareholders nowhere. I am considering my position. Thoughts?

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grb 28th Nov '18 29 of 30

In reply to post #401334

Re OPG Power Ventures (LON:OPG), my comments from September now seem quite unusually prescient - that would have been a good entry point. it was up 38% yesterday after the half-year report - it seems like the market is now waking up to the turnaround case now that the reported figures are much less of a mess. It looks like they have a reasonable chance of paying the remaining debt off over the next five years or so. The recent falls in coal prices have helped them too. Wishing now that I'd averaged down more heavily!

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financeguru2000 30th Nov '18 30 of 30

Hiya... Can anyone let me know why is Miton (LON:MGR) tanking at this point. Down by nearly 30%.


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 Are LON:DUKE's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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