Small Cap Value Report (Thur 30 August 2018) - DUKE, CHH, XAR, ARW, HSS, KETL, CRAW, OMI

Thursday, Aug 30 2018 by
51

Good morning! 

Lots of interesting stories to digest today.




Duke Royalty (LON:DUKE)

  • Share price: 45p (+1%)
  • No. of shares: 198 million
  • Market cap: £89 million

New royalty agreement

Please note that I currently own DUKE shares.

Duke is an unusual investment vehicle. I wrote about it last month, when it raised £44 million in new equity.

It has raised £79 million (gross) in total from investors so far, at 40p and 44p.

As I have written previously, it won't be a very confident hold for me until I feel happy with its level of diversification.

Today we have news of a £10 million deal, including the temporary option to increase the investment by a further US $5 million. I guess it will do that depending on progress with other deals over the next few months.

The yield is fantastic: over 13% in cash, received monthly. The payments will vary in future years depending on revenue generation by the investee's parent.

The investee is a Canadian company, operating internationally. It specialises "in the development, commissioning and management of healthcare facilities and services using a public-private partnership model. "

Payments will be received for 30 years unless the investee exercises its buyback option. Note that there is no repayment of principal at the end of 30 years. It works more like an annuity.

My opinion

The Duke portfolio has five investees now - it is gradually improving its diversification. My confidence is very slowly improving, the longer we go without a mishap. There is a long way to go yet.

The main attraction for me is the high yield that Duke achieves with each deal, and the possibility that it could compound this wealth over time by reinvesting the proceeds.

The dividend yield is of less importance, but it doesn't hurt. The most recent quarterly dividend was 0.7p, implying a…

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Disclaimer:  

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 »

LSE Price
43.2p
Change
 
Mkt Cap (£m)
85.5
P/E (fwd)
12.5
Yield (fwd)
7.7

Churchill China plc is a United Kingdom-based manufacturer and distributor of tabletop products to the hospitality and retail sectors across the world. The Company's customers include pub, restaurant and hotel chains, sports and conference venues, health and education establishments, and contract caterers. The Company's segments include Hospitality and Retail. The Company primarily offers ceramic tableware. The Company also manufactures and sources product sold through Retail customers for consumer use in the home, in various markets across the world. The Company offers Churchill branded manufactured products. The Company offers various types of products, such as accessories, beverage pots, bowls and dishes, cake stands, cookware, cups, mugs, cutlery, dip pots and sauce dishes, glassware, jugs, melamine items, plate towers, plates, saucers and wooden items. Its collections include Alchemy Fine China, Churchill Super Vitrified, Art de Cuisine, Sola Cutlery and Lucaris Glassware. more »

LSE Price
1220p
Change
 
Mkt Cap (£m)
133.9
P/E (fwd)
18.3
Yield (fwd)
2.4

Xaar plc is engaged in the development of digital inkjet technology and manufacture of piezoelectric drop-on-demand industrial inkjet printheads. The Company's segments are product sales, commissions and fees, and royalties. It offers a range of industrial inkjet printheads and printhead systems, which are designed and produced to meet the customer-driven requirements of a range of manufacturing applications. Its primary markets include wide-format graphics, ceramic tiles, labels, packaging, coding and marking, three-dimensional (3D) printing, advanced manufacturing and decorative laminates. The Company sells its technology in component form (the printhead) to original equipment manufacturers (OEMs) producing and selling the complete digital printing solution to the end market. It partners and co-develops with fluid suppliers, hardware and software integrators, and substrate suppliers to deliver a total solution to the end user. more »

LSE Price
147.8p
Change
0.4%
Mkt Cap (£m)
115.6
P/E (fwd)
38.7
Yield (fwd)
6.0



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


38 Comments on this Article show/hide all

LovelyLovelyGorgeous 30th Aug 19 of 38
1

Arrow Global (LON:ARW) the main worry seems to be that company is deliberately running its cash flow negative. They have said that they do not intend to buy any more companies and to reduce leverage over the next year. All the debt collectors seem to be running a negative approach and my guess is that if things started to "turn down" they would stop buying new debt portfolios and use the cash inflows to then turn cash positive.

I am long, think the company is well run and think that the shorters / continued share price weakness is gradually wearing down the long term holders and so encouraging a downward spiral. I intend to stay long.

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barnetpeter 30th Aug 20 of 38
4

Has anyone noticed the steady fall in RBG Revolution Bars recently? Popular stock on here hit 117p this morning. A long time it seems since it was subject to a takeover bid at £2. A bargain or going below the 100p levels?

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John Gibson 30th Aug 21 of 38
4

I was just about to ask the same about RBG, anybody know any reason for the fall?
Many thanks,
J

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Zipmanpeter 30th Aug 22 of 38
2

In reply to post #394719

Re Morses Club (LON:MCL) - I believe the drop from 174p probably reflects a natural pullback after a 34% run up from 130p as recently as April 18. Still good value but at the of the day, trading is "in line" but loan growth was only up +4.3%, impairment "within the Company's IAS 39 guidance range" and customer numbers flat at 229K. Non-Standard Finance (LON:NSF) (I hold) also reported weak numbers on Home Credit in early August (vs booming sales in brand and guarantor lending) whilst Provident Financial (LON:PFG) 's operations are stabilising.

Personally, I think that the fall out from Provident Financial (LON:PFG) has been an accelerated net reduction in the Home Credit market. MCL also made no mention of leading consolidation as a potential source of home credit growth although this may wait for finals.

Morses Club (LON:MCL) were also noticeably downbeat/reticent about Dot Dot Loans which "continues to develop and is providing us with useful customer insights and learnings"......But not it seems a profitable and significant new business line to complement a structurally declining Home Credit market!!

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Zipmanpeter 30th Aug 23 of 38
2

In reply to post #394744

Re Revolution Bars (LON:RBG) - hoping recent decline is simply small traders fears over incoming Brexit plus annualisation of Stonegate bid (ie I gave it a year and they did not come back).  Volumes traded remain tiny so no sign of a big player moving.

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Graham Neary 30th Aug 24 of 38
2

In reply to post #394599

rtj, sorry to disappoint today! Don't have a view on either of them. G

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Graham Neary 30th Aug 25 of 38
8

In reply to post #394684

TheShareWhisperer, I don't bother with speculative pharma, or indeed with pharma in general.

re: OptiBiotix Health (LON:OPTI), out of curiosity I've just looked up their half-year report from August 2016. They said:

"OptiBiotix has made strong progress during this period in its strategy of developing compounds which modify the human Microbiome and commercialising these through partnering with food, health, wellbeing, and pharmaceutical companies."

At the half-year report in August 2017, they said:

"This period reflects the transition of OptiBiotix from a research and development company to a commercial business with the appointment of a commercial team, product launches, and a number of sales agreements signed at the end of the period providing future revenue streams."

Today they said:

This period reflects the continued transition of OptiBiotix® from a research and development company into a commercial business, with seven commercial deals in six months covering the USA (two deals), Asia (one each in India and Pakistan), Europe (two deals), and a deal with a global brand who is one of the world's largest providers of dairy products.

Commercialisation has been just around the corner for a while! 17 deals announced since March 2017 and still not much by way of revenue. Good luck to them.

Graham

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Graham Neary 30th Aug 26 of 38
2

In reply to post #394664

Strix (LON:KETL)

Hi SundayTrader, since it runs off the value of its patents it doesn't need much equity capital, hence the high ROCE. 

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fredericktug 30th Aug 27 of 38
3

In reply to post #394739

I suspect it's just a case of declining LFL's, sector sentiment still poor, take-over hopes fading. Their last results blamed both cold AND hot weather, which just sounded a bit silly as I recall. Also, they lost their CFO after the 2017 profit warning and then the CEO after the bid, with a new CEO only starting in June.

I remain long. I think there's value to be had, and the yield is now pretty good. Deltic would still like to acquire or merge, and were buyers recently, so there is some, albeit limited takeover potential. Also of note is that they are still growing/opening new outlets, on better rents, so the growth story is still just about in tact.

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Camtab 30th Aug 28 of 38
1

Graham, nice piece on Xaar. Very tricky to assess, as you say strong balance sheet (total assets over 5 times total liabilities), but dividend surely must be cut now. Margin has been falling and the return on capital and equity not too exciting. After fall you can pick shares up around book value which feels good. But high multiple and it just disappointed. I can't help feeling you will pick them up cheaper than this in 2 weeks time.
All the best

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andyfwwrench 30th Aug 29 of 38
5

Filtronic (LON:FTC) - The orders for antennae support the roll out of 5G, which is indeed just getting underway.

Orosur Mining Inc (LON:OMI) - not sure I recognise any of that description of management Graham! I don't think it ever had true free cash flow as even at the peak of the gold price it still wasn't covering the all in replacement cost of what it was extracting in the present. The trouble with any hole in the ground company is that its cash generating assets are continuously depleting. As the only way of getting money back are dividends or a trade sale one has to estimate the discounted NPV to be a multiple of EV to think there is any kind of market beating return to be had. At least for quarrying / mining marginal costs increase with depth, and grades tend to get lower. Oil / gas can be better because enhanced recovery techniques can extend field life with very good economics.
Even a good operator such as Randgold Resources (LON:RRS) is currently massively over valued. At current mining rates it has 15 years worth of a generous combined reserves and resources. The covered dividend give an investor their money back in just over 20 years. Yes the price of gold could go up, but so will the cost of mining, especially with depth. Ideally one does want to produce as quickly as possible, but ipso facto cash returns to investors must be even more rapid because life of mine is short. To say that careful and cautious analysis is required is an understatement.

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john2 30th Aug 30 of 38
3

In reply to post #394749

Surely the Morses Club price fall is also affected by the highly publicised problems of Wonga.

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Emperor 30th Aug 31 of 38

In reply to post #394644

OptiBiotix Health (LON:OPTI) looks like it will need more cash soon. £1.7m cash at half year and £1m+ loss for H1. No wonder the SP is heading south. After all these deals over the last 18 months when will products be launched and revenues start flowing through? At least another 12 months for first real revenue?

Like the idea behind it but seems like lots of huff and puff with little substance, no irony intended, at this stage. Might look t buy in on next fundraise if it is after some products hit the market.

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Edward John Canham 30th Aug 32 of 38

In reply to post #394784

Xaar (LON:XAR)

Agree. Even now, at book value (although not TBV), the PER is way too high. Still 20+ for a company which made profits of £15m in 2016 and is forecast to make £7m in 2019.

I think relying on book value is dangerous except for property companies and investment trusts.

Phil

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Effortless Cool 30th Aug This post has been moderated
5
PJ0077 30th Aug 34 of 38
7

Great work Effortless, in bringing this forum one step closer to the ADVFN asylum

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DJCP 30th Aug 35 of 38

Graham,

Now it's out of hours, and not even sure you read the late/previous day's posts, but if you're inclined to put your 'financial-sector' hat on tomorrow, if it's a quiet-ish day, I would be interested to know your views on the Wonga fiasco, and also to a lesser extent, your (and other investors) general view on the Argentina situation, seeing as they've just put up interest rates from 45% to 60%.

As a matter of interest, does anyone know how/where to look to invest in Argentine government bonds? Not saying I will, but with the situation as it stands, I'm slightly interested from an investment view, but more-so from a personal view, as my cousin recently married an Argentine, and is contemplating moving over there, and he'll definitely not be aware of what's happening. Thank you.

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Graham Neary 31st Aug 36 of 38
1

Hi DJCP, I read all the comments (except those that turn invisible for one reason or another).

Wonga is a big story indeed. I've been passively taking in the news. Marginally improves my outlook on H & T (LON:HAT) - it's not a direct competitor to us, but a competitor all the same.

Don't have much of a view on Argentina, could have a root around tomorrow.

ATB

Graham

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JohnWigg 31st Aug 37 of 38
4

In reply to post #394829

@ PJ0077 - "the ADVFN asylum". I suppose, to push your metaphor a bit further, the staff have deserted the building! So there's no moderation, but you do have the filter function, and a few more sanctions if you pay for them.

In defence, though, it's free, and a bit like panning for gold. There are some pretty knowledgeable and shrewd posters, and it's possible to go deeply in discussion of a single company. With experience, you can filter out the noise and use the site for mutual enrichment (literally!).

Incidentally, I didn't see the deleted post by EC but he does post on ADVFN and I'd see him as one of the good guys over there.

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gus 1065 31st Aug 38 of 38
1

In reply to post #394809

Hi Emperor.

OptiBiotix Health (LON:OPTI) has been marketing it’s weight loss products online under the Go Figure moniker for a couple of years now. The current website can be a bit clunky but serves a purpose and is imminently due for an upgrade release. Link is here:-

https://www.gofigurediet.com

Most of the reported deals activity seems to relate to putting in place various licensing/manufacturing/ distribution partnerships around the world which puts them in a position to scale up quickly at someone else’s expense should the opportunity arise. I agree sales have been pretty sluggish but in the fickle world of consumer lifestyle/health products they’re possibly one celebrity endorsement in the Daily Mail away from making the big break through. (Quid pro quo, they may also get called out for their products being completely useless/dangerous).

FWIW, I trialled one of their 3 week diet packs (and subsequently extended it) after a recent back op left me overweight and have lost 22lbs in just under 3 months. Whether that’s causal or simply coincidence, products seemed to work for me. (That’s not the celebrity endorsement by the way!)

On the recent share price movement, it doubled during the summer to about 130p and his since fallen back to about 100p. Part of this may be due to long time advocate TW/Share Prophets calling the share rise excessive and calling investors to take profits.

Gus.

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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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