REG - Duke Royalty Limited - Final Results for the year ended 31 March 2023
04/07/2023 07:00
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RNS Number : 8324E Duke Royalty Limited 04 July 2023
4 July 2023
Duke Royalty Limited
("Duke Royalty", "Duke" or the "Company")
Final Results for the year ended 31 March 2023
Duke Royalty Limited (AIM: DUKE), a provider of alternative capital solutions
to a diversified range of profitable and long-established businesses in Europe
and abroad, is pleased to announce its audited final results for the 12 months
ended 31 March 2023 ("FY23").
FY23 Highlights
· 46% year-on-year increase in recurring cash revenue* to
£21.8 million (FY22: £14.9 million)
· 19% year-on-year increase in total cash revenue to
£21.9 million (FY22: £18.4 million)
· Free cash flow of £13.1 million, up 9% from £12.1
million in FY22
· Free cash flow** per share reduced from 3.53p in FY22
to 3.30p in FY23, due to lack of investment buyouts
· 30% increase in recurring free cash flow per share from
2.52p per share to 3.27p per share
· 24% year-on-year increase in dividend per share of to
2.80p (FY22: 2.25p)
· Deployed over £26 million of capital, adding two new
royalty partners to the portfolio and completed four material follow-on
investments into existing royalty partners
· £20 million of equity capital raised in oversubscribed
placing
· Refinanced and upsized a £100 million credit facility
to facilitate more investment opportunities
Post Period End Highlights
· Achieved £6.0 million of recurring cash revenue in Q1
FY24, representing an 18% year-on-year increase (Q1 FY23: £5.1 million) and
an increase on Q4 FY23
· Exited royalty partner Instor, receiving net cash of
US$11.2 million at closing, delivering a total gain of US$2.4 million over
Duke's initial investment amount and a triple digit IRR
· Two additional follow-on investments completed in Q1
into Tristone and New Path Fire & Security
* Recurring cash revenue excludes buyout premiums and cash gains from the sale
of equity investments
** Free cashflow is defined as net cash inflows from operations plus cash
gains from the sale of equity investments less interest paid on borrowings
Neil Johnson, CEO of Duke Royalty, said:
"We are delighted to announce that we have achieved a strong set of financial
results across all our important financial metrics for the 12 months to 31
March 2023. Despite the prevailing macro uncertainties, it also brings forth
opportunities. We understand that during times of short-term uncertainty,
business owners seek long-term capital solutions, which further reinforces the
attractiveness of our proposition to them, as our solution offers both
investors and shareholders what they desire - a long-term, predictable revenue
stream with a focus on dividends.
"Having achieved £2.0 million per month of cash revenue in Q1 FY24, this
represents the 11(th) consecutive quarter of delivering increasing quarterly
recurring cash revenue. With this in mind, we have witnessed a very healthy
and promising pipeline of new partners. The recent increase in deal flow has
been encouraging, as it demonstrates the attractiveness of our proposition in
a difficult funding market, and we are confident that our product continues to
demonstrate its competitiveness against other financing options available to
small businesses."
Investor Presentation
Neil Johnson, CEO, and Hugo Evans, CFO, will also provide a live investor
presentation relating the Full Year Results via the Investor Meet Company
platform on Thursday 13 July at 13:30 BST.
The presentation is open to all existing and potential shareholders. Questions
can be submitted via the Investor Meet Company dashboard up until 9 a.m. the
day before the meeting or at any time during the live presentation.
Investors can sign up to Investor Meet Company for free and add to meet Duke
Royalty via:
https://www.investormeetcompany.com/duke-royalty-limited/register-investor
(https://www.investormeetcompany.com/duke-royalty-limited/register-investor)
Investors who already follow Duke Royalty on the Investor Meet Company
platform will automatically be invited.
Annual Report & Accounts
The 2023 Annual Report and Accounts are expected to be posted to shareholders
on Monday 10 July 2023, together with a notice of the Company's Annual General
Meeting. An electronic copy of the Annual Report and Accounts will also be
available to view on the Company's website at www.dukeroyalty.com
(http://www.dukeroyalty.com)
This announcement contains inside information.
For further information, please contact www.dukeroyalty.com, or contact:
Duke Royalty Limited Neil Johnson / Charles Cannon Brookes / Hugo Evans +44 (0) 1481 231 816
Cenkos Securities plc Stephen Keys / Callum Davidson / Michael Johnson +44 (0) 207 397 8900
(Nominated Adviser and
Joint Broker)
Canaccord Genuity Adam James / Harry Rees +44 (0) 207 523 8000
(Joint Broker)
SEC Newgate Elisabeth Cowell / Alice Cho / Matthew Elliott +44 (0) 20 3757 6880
(Financial Communications) dukeroyalty@secnewgate.co.uk (mailto:dukeroyalty@secnewgate.co.uk)
About Duke Royalty
Duke Royalty Limited provides alternative capital solutions to a diversified
range of profitable and long-established businesses in Europe and abroad. Duke
Royalty's experienced team provide financing solutions to private companies
that are in need of capital but whose owners wish to maintain equity control
of their business. Duke Royalty's royalty investments are intended to provide
robust, stable, long term returns to its shareholders. Duke Royalty is listed
on the AIM market under the ticker DUKE and is headquartered in Guernsey.
Chairman's Statement
Dear Shareholder,
I am pleased to report a strong set of results for the financial year ending
31 March 2023 ("FY23"), which once again demonstrated the resilience of Duke's
business model to perform robustly in both a positive and challenging
macroeconomic environment.
It is fair to say that FY23 presented a challenging operating environment for
Duke's royalty partners. They battled against interest rate hikes and supply
chain issues, alongside a significant increase in corporate energy prices and
a general shortage of labour. Furthermore, overall consumer demand was
affected by surging utility bills and food prices, resulting in a general
reduction of consumer discretionary spend. Despite these challenging
circumstances, I would like to congratulate Duke's royalty partners for their
extremely resilient operating performance in FY23.
Duke's strategic focus on providing long-term, secured lending to established
and profitable owner-operated businesses has proven to be a safeguard against
these economic challenges. Moreover, the very low amortisation payments of
Duke's product in the early years have alleviated some of the short-term
liquidity concerns of our royalty partners, allowing them to focus on managing
their businesses rather than having to refinance their debts during
unfavourable times. This, together with a long-term partnership approach which
has always been at the core of Duke's investment and corporate philosophy, has
helped support our partners through these times of macroeconomic pressure.
It is worth noting that one of the inevitable consequences of the substantial
increase in global interest rates has been the material increase in the cost
for all other competing forms of short-term debt. However, Duke's permanent
equity capital base and its long-term lending approach throughout economic
cycles have enabled the Company to refrain from increasing the cost of its
offering in the short-term. As a result, we have experienced a notable
increase in both the number and the quality of deal opportunities that Duke
has been offered, the benefits of which will be witnessed in the current
financial year and in the periods ahead.
Outlook
FY23 has been a year of relentless collaboration between the Duke team and our
royalty partners, as we work together to overcome significant economic
challenges they have faced. I would like to take this opportunity to thank
them for their considerable efforts. As a long-term investor, Duke believes
that a business' long-term success is directly correlated to its business
approach and management of their environmental, social and governance
considerations. We remain committed to adhering to the commitments set out in
the Company's Responsible Investment Policy.
Whilst the macro environment continues to create ongoing challenges for our
royalty partners, the higher level of global interest rates and continued lack
of demand from the mainstream banks to lend to well-managed, profitable SMEs,
puts Duke in an ideal position to selectively deploy further capital and
increase market share. As a result, I expect to see a higher deployment rate
in FY24 than we saw in FY23.
Over the past few years, Duke has been able to put together a diverse
portfolio, and now has exposure to 62 underlying operating companies. In FY23,
The Company was able to release a series of record quarterly recurring cash
revenue updates, which is a trend that I expect to see continue into FY24.
This is attributable to the anticipated growth in deployment rate, alongside
positive adjustment resets linked to the underlying companies' organic revenue
performance in this inflationary macroenvironment.
As always, I would like to express my gratitude to the ongoing support of our
shareholders and to the achievements of our employees. It is my pleasure to
report the Chairman's Statement for FY23. I look forward to reporting on the
Group's ongoing progress and development, and I remain cautiously optimistic
about the Company's future.
Nigel Birrell
Chairman
CEO's Statement
In 2022, businesses around the world faced a remarkable landscape that
surpassed the unprecedented challenges brought by the pandemic in 2020. The
Bank of England's 12th consecutive interest rate hikes brought rates to their
highest level in almost 15 years, and inflation being at a 40-year high has
further intensified the economic climate. The geopolitical situation in Europe
also demanded our attention and played a crucial role in shaping our decisions
at Duke.
Despite this, I am pleased to report that Duke managed a strong set of
financial results across all our important financial metrics. In particular,
our recurring cash revenue grew 46% to £21.8 million against £14.9 million
in FY22 and our recurring cash revenue per share grew 30% over FY22. It is
reassuring to note our solution continues to deliver for investors and
business owners alike during these challenging times.
However, during FY23, we exercised caution in our approach to new deployments,
analogous to the Covid-19 impaired FY21. With rapidly changing macroeconomic
developments, we chose caution in allocating shareholder funds following our
successful fundraising efforts in May 2022, which resulted in four follow-on
investments (totalling £11.5 million) into existing partners and two new
royalty agreements (totalling £12.3 million). During the 12 months under
review, we deployed a total of £26.8 million, spread over several geographic
markets in line with our strategy, while also reinforcing our portfolio in our
core territories. This strategic decision reflects our prudent approach to
capital allocation and our commitment to ensuring that financial stability is
maintained. Nevertheless, we continued to diversify the portfolio, ending the
period with exposure to 61 underlying operating companies with an aggregate
book cost of £185 million. We continue to maintain a close relationship with
our royalty partners, which generally performed robustly during the period,
and are reassured of their resilience to trading in the current market
conditions.
It is important to note that we feel the prevailing macro uncertainties do not
pose only risks, but also opportunities. We know that when there is short term
uncertainty, business owners seek long term capital solutions, reinforcing the
attractiveness of our proposition to them. What sets Duke apart is our
long-term strategic partnership approach, which offers business owners the
certainty of sustainable capital without significant dilution of their
ownership or large capital repayments which need refinancing.
The credit and equity characteristics of our hybrid model drives our
relationships with all of our stakeholders
Our shareholders who participate in our regular shareholder meetings,
conferences and podcasts will know, we believe Duke has a unique value
proposition for shareholders. At the core of our offering is a focus on
preserving capital, which is why our royalty agreements are structured as
senior secured loans. We aim to provide a healthy dividend to investors, which
is our second priority, investing into profitable, longstanding private
companies. And unlike a traditional debt product, as our third priority, we
look to be rewarded in the event of a positive outcome at the time of the
buyout. The six buyouts achieved since inception have shown that our product
has produced the results we intended.
Our hybrid model also drives our relationships with our royalty partners. We
see ourselves as more than just a lender. We are economically invested in the
long-term success of the partners we work with, like equity owners. However,
because we have downside protections to preserve our capital, we also have
capped our equity participation. The combination of these factors means that
Duke's model combines the best elements of private equity and private credit.
Duke's approach allows us to develop good relationships with our royalty
partners. Receiving monthly management accounts gives us regular and in-depth
financial information to ensure our royalty partners are performing to budget.
In addition, we actively engage with our portfolio companies through Board
representation and/or monthly management meetings. This involvement allows us
to provide continuous support and strategic guidance throughout their journey,
helping them to navigate through headwinds and to seize opportunities. We do
this because we are economically incentivised in the growth of the company
through our annual adjustment factor and when we have minority equity stakes.
However, the business owners know they control the destiny of the company and
have the incentive to succeed. With our alignment of interests, I am delighted
to be able to observe the exceptional dedication to meet all challenges head
on of our current royalty partners, and we remain fully dedicated to
supporting their ongoing growth in the future.
Our model augments the resilience of our existing partners in the face of
market fluctuations. Unlike floating-rate loans, Duke's monthly payments from
our royalty partners change only once per year at the annual adjustment date
according to the revenue performance of the business, and the adjustment is
capped. This aligns Duke's return with the performance of the royalty partners
over the long-term and gives them certainty of their obligations to us as
senior lender, leading to confidence of decision making during these
challenging times.
With this in mind, Duke's partners generally performed robustly in the period,
with inflationary forces driving the average yield of the Company's portfolio
to 13.1%, its highest level to date. Duke also received 94% of its expected
cash revenue payments in the period and the Company was able to increase our
recurring cash revenue each quarter throughout the financial year.
I am pleased to be able to report that at period end, Duke had over £50
million of liquidity available to deploy into its pipeline of opportunities
with FY24 gearing up to be a busy period for the Company.
Financial Review
In May 2022, Duke announced a £20 million equity placing from both
institutional and retail investors. Net proceeds from this fundraising were
used to repay the existing debt and provide additional liquidity headroom,
allowing the Company both to invest further capital into its existing royalty
partners as well into new opportunities.
During the period, we were delighted to announce that we had entered into a
new £100 million credit facility agreement with Fairfax Financial Holdings
Limited and certain of its subsidiaries ("Fairfax"). In refinancing and
upsizing our credit facility, we secured a significant amount of additional
liquidity, prolonging our requirement for additional equity capital. We also
reduced the headline interest rate by 225 bps in comparison to our previous
facility, leading to an immediate and material impact on our free cash flow.
This support from such a reputable firm represents a huge endorsement of our
business model, and we look forward to a long-term relationship with Fairfax.
The financial results for FY23 represent a strong operating performance and I
am pleased to report that the Company's cash revenue, being cash distributions
from royalty partners, cash gains from the sale of equity investments and
buyout premiums, grew to £21.9 million during the Period under review, a 19%
increase over the £18.4 million generated in FY22.
However, as our portfolio matures and buyouts start to become a material part
of the of the Group's cashflows, it is important to distinguish between
recurring and non-recurring cash revenue. Recurring cash revenue relates to
the annuity-like monthly cash revenue streams that Duke receives from its
royalty partners, as opposed to the non-recurring nature of buyout premiums
and realised gains on equity that Duke receives on an investment exit. In
FY22, the Group benefited from a royalty buyout and an equity realisation
event, which delivered over £3.5 million of premiums and realised equity
gains. Therefore, on a like-for-like basis, FY23 produced £21.8 million of
recurring cash revenue against £14.9 million in FY22, a 46% increase.
Free cash flow, defined as net operating cash inflow plus cash gains from the
sale of equity investments less its interest on debt financing, also continued
to grow, increasing by 9% to £13.1 million. However, if we strip out the
non-recurring cash revenue, then recurring free cash flow actually grew 51%
from £8.6m to £13.0 million, while recurring free cash flow per share grew
30% to 3.27 pence per share, a significant achievement given a
macroenvironment of high inflation and soaring interest rates. It is these
last two metrics that are particularly pleasing as it is these that derive our
ability to continue paying a steady quarterly dividend to our shareholders.
Total income, which includes non-cash fair value movements on the Company's
investment portfolio, grew to £31.0 million, an 8% increase over FY22. This
generated total earnings after tax of £19.6 million and earnings per share of
4.92 pence against £20.4 million in FY22 and earnings per share of 5.95
pence. Adjusted earnings, which strips out the fair value movements, decreased
5% from £13.1m in FY22 to £12.5m in FY23, due to the lack investment exits
in FY23.
Dividend
Duke maintained a 0.70 pence quarterly dividend throughout FY23, equating to
an annualised dividend of 2.80 pence which represents a material increase from
the 2.25 pence per share of dividends paid out in FY22. Despite the high
dividend yield percentage at the current share price, I can reassure
shareholders that the dividend remains well covered by recurring free cash
flow.
Duke Royalty's ESG initiatives
By definition, a royalty company itself has a small environmental footprint,
being an investment company in other companies. Since inception over eight
years ago, our business model has been underpinned by an ethos of responsible
investing. We do not invest in extraction industries, and we support business
owners who have a positive impact in providing local jobs and keeping
ownership in their hands for the betterment of their communities.
As we have increased capital deployed in an expanding number of companies, we
understand our duty and influence in asking more of our royalty partners' ESG
credentials. We admire each company's leadership as they work to improve the
lives of their employees, their communities, and the world they inhabit.
While we can only help indirectly with our royalty partners' operations, the
Duke team has led by example and remains deeply committed to making a positive
social impact in the world we live in.
Duke Royalty's leaders are also leaders in their community. I am the Founder
and Chair of the UK Terry Fox Association and Hugo Evans our CFO acts as
Treasurer. It is the UK affiliate of the Terry Fox Foundation, which has
raised over £500 million for cancer research in the name of Canada's hero.
Terry Fox ran 143 consecutive marathons in the summer of 1980 on a prosthetic
leg before cancer returned and forced him to stop. Terry Fox died less than a
year later, but the Terry Fox Run was born. The money we raise stays in the
UK, supporting the UK's #1 academic cancer research centre, The Institute of
Cancer Research (ICR). Our mission is to bring communities and families
touched by cancer together for the free, family friendly and non-competitive
Terry Fox Runs across the UK. Since I re-started the London Terry Fox Run in
2020, we have raised over £200,000 for the ICR, and our goal is £1,000,000
by 2030. This year, there will be four Terry Fox Runs across the UK. Every
year, the Duke team and their families come together to support cancer
research and volunteer their time.
Recognising the importance of giving back to local communities, we have also
extended our support to Home-Start UK, a network that assists needy families
with young children during challenging times. In additional to our financial
contributions, the Cannon Brookes family volunteers and advocates for the
importance of a healthy and supportive family unit in the first years of life.
Professional care workers provide emotional and financial support to single
mothers and underprivileged families with young children. This makes a direct
impact in the local UK neighbourhoods where Home-Start is active.
Our outlook is one of cautious optimism
The year to 31 March 2024 has already kicked off to a positive start, with
Duke achieving an average monthly recurring cash revenue of £2.0 million for
the first time for Q1 FY24. A quarter of £6.0 million recurring cash revenue
represents a 18% year on year increase (Q1 FY23: £5.1 million) and will be
our 11(th) consecutive quarter delivering increasing recurring cash revenues.
In addition, we have had our first buyout since 2021 during the first three
months of the current financial year. A key aspect that distinguishes Duke is
our commitment to empowering business owners by allowing them to retain
control over their exit strategies. This was illustrated well with the recent
positive exit we announced in May where the terms of Duke's capital
facilitated Instor's CEO decision to opportunistically sell the company to a
private equity firm, and in turn delivered a triple digit IRR to Duke. This is
an attractive differentiator of our capital which enhances the appeal of our
long-term, passive capital for business owners and is just one of the
qualities that reaffirms Duke's strong position to capture an important share
of the private funding market.
One consequence of the rapidly increasing interest rates of 2022 is that
Duke's monthly payments have become more competitive to floating rate interest
rate payments. For business owners, the monthly payment is their total
obligation to Duke subject to only the annual adjustment. The certainty of
knowing future obligations, without a looming refinancing event, is
increasingly attractive to business owners. With this in mind, we have
witnessed a very healthy and promising pipeline of new partners. The recent
increase in deal flow has been encouraging, demonstrating the attractiveness
of our proposition in a difficult funding market, and we are confident that
our product continues to demonstrate its competitiveness against other
financing options available to small businesses.
Royalty finance has a longstanding history in North America, drawing investors
with its ability to provide downside protection during times of crisis.
Similar to how the pandemic showcased the resilience of this model, we believe
the current economic environment offers us the opportunity to continue
demonstrating the ability of our approach to withstand market cycles. We see a
bigger opportunity ahead, as our solution offers both investors and
shareholders what they desire: a long-term, predictable revenue stream with a
focus on dividends.
We are pleased to report another year of delivering on the promise of our
business model for our shareholders: a long-term, predictable revenue stream
with a focus on dividends. I would like to personally thank our shareholders,
our royalty partners, our employees and our Board as we look forward to
continued success.
Neil Johnson
Chief Executive Officer
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 MARCH 2023
Year to Year to
31-Mar-23 31-Mar-22
£000 £000
Cash flows from operating activities
Receipts from royalty investments 9 21,364 14,701
Receipts of interest from loan investments 10 339 580
Other operating receipts 176 543
Operating expenses paid (3,306) (2,487)
Payments for royalty participation fees 12 (112) (115)
Tax paid (1,346) (2,055)
Net cash inflow from operating activities 17,115 11,167
Cash flows from investing activities
Royalty investments advanced 9 (23,809) (74,586)
Royalty investments repaid 9 - 2,938
Loan investments advanced 10 (2,500) (3,192)
Loan investments repaid 10 2,000 3,949
Equity investments purchased 11 (500) (530)
Equity investments sold 11 - 2,883
Equity dividends received 11 3 -
Receipt of deferred consideration - 7,679
Investments costs paid (357) (972)
Net cash outflow from investing activities (25,163) (61,831)
Cash flows from financing activities
Proceeds from share issue 17 20,000 35,000
Share issue costs 17 (1,115) (1,936)
Dividends paid 20 (10,979) (7,270)
Proceeds from loans 15 71,250 38,200
Loans repaid 15 (61,450) (7,500)
Interest Paid 15 (3,976) (1,649)
Other finance costs (2,426) (181)
Net cash inflow from financing activities 11,304 54,664
Net change in cash and cash equivalents 3,256 4,000
Cash and cash equivalents at beginning of year 5,707 1,766
Effect of foreign exchange on cash (24) (59)
Cash and cash equivalents at the end of year 8,939 5,707
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2023
Note Year to Year to
31-Mar-23 31-Mar-22
£000 £000
Income
Royalty investment income 9 28,266 18,037
Loan investment income 10 339 533
Equity investment income 11 2,212 9,678
Other operating income 176 543
Total Income 30,993 28,791
Investment Costs
Transaction costs (66) (631)
Due diligence costs (620) (1,113)
Total Investment Costs (686) (1,744)
Operating Costs
Administration and personnel 5 (2,627) (2,060)
Legal and professional (456) (405)
Other operating costs (223) (151)
Expected credit losses 10 (20) (72)
Share-based payments 18 (969) (930)
Total Operating Costs (4,295) (3,618)
Operating Profit 26,012 23,429
Net foreign currency movement 66 (60)
Finance costs 6 (5,644) (1,996)
Profit before tax 20,434 21,373
Taxation expense 7 (842) (982)
Profit after tax 19,592 20,391
Basic earnings per share (pence) 8 4.92 5.95
Diluted earnings per share (pence) 8 4.92 5.95
All income is attributable to the holders of the Ordinary Shares of the
Company. There is no other comprehensive income.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
FOR THE YEAR ENDED 31 MARCH 2023
Note 31-Mar-23 31-Mar-22
£000 £000
Non-current assets
Goodwill 16 203 203
Royalty finance investments 9 158,540 139,648
Loan investments 10 4,652 3,172
Equity investments 11 13,529 10,820
Trade and other receivables 13 - 2,141
Deferred tax 21 200 156
177,124 156,140
Current assets
Royalty finance investments 9 32,793 20,831
Loan investments 10 - 1,000
Trade and other receivables 13 2,290 53
Cash and cash equivalents 8,939 5,707
Current tax asset 373 -
44,395 27,591
Total Assets 221,519 183,731
Current liabilities
Royalty debt liabilities 12 154 160
Trade and other payables 14 433 423
Borrowings 15 441 362
Current tax liability - 87
1,028 1,032
Non-current liabilities
Royalty debt liabilities 12 988 951
Trade and other payables 14 1,314 1,067
Borrowings 15 53,930 47,740
56,232 49,758
Net Assets 164,259 132,941
Equity
Share capital 17 172,939 153,974
Share-based payment reserve 18 3,447 2,478
Warrant reserve 18 3,036 265
Retained losses 19 (15,163) (23,776)
Total Equity 164,259 132,941
The Consolidated Financial Statements were approved and authorised for issue
by the Board of Directors on 3 July 2023 and were signed on its behalf by
Directors Maree Wilms and Matt Wrigley.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2023
Share-based
Shares payment Warrant Retained Total
Note issued reserve reserve losses equity
£000 £000 £000 £000 £000
At 31 March 2021 120,870 1,548 265 (36,897) 85,786
Total comprehensive income for the year - - - 20,391 20,391
Transactions with owners
Shares issued for cash 17 35,000 - - - 35,000
Share issuance costs 17 (1,936) - - - (1,936)
Shares issued to key advisers as remuneration 17 40 - - - 40
Share based payments 18 - 930 - - 930
Dividends 20 - - - (7,270) (7,270)
Total transactions with owners 33,104 930 - (7,270) 26,764
At 31 March 2022 153,974 2,478 265 (23,776) 132,941
Total comprehensive income for the year 19,592 19,592
Transactions with owners
Shares issued for cash 17 20,000 - - - 20,000
Share issuance costs 17 (1,115) - - - (1,115)
Shares issued to key advisers as remuneration 17 80 - - - 80
Warrants issued 18 - - 2,771 2,771
Share based payments 18 - 969 - - 969
Dividends 20 - - - (10,979) (10,979)
Total transactions with owners 18,965 969 2,771 (10,979) 11,726
At 31 March 2023 172,939 3,447 3,036 (15,163) 164,259
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2023
1. General Information
Duke Royalty Limited ("Duke Royalty" or the "Company") is a company limited by
shares, incorporated in Guernsey under the Companies (Guernsey) Law, 2008. Its
shares are traded on the AIM market of the London Stock Exchange. The
Company's registered office is shown on page 73.
Throughout the year, the "Group" comprised Duke Royalty Limited and its wholly
owned subsidiaries; Duke Royalty UK Limited, Capital Step Holdings Limited,
Capital Step Investments Limited, Capital Step Funding Limited, Capital Step
Funding 2 Limited and Duke Royalty Employee Benefit Trust.
The Group's investing policy is to invest in a diversified portfolio of
royalty finance and related opportunities.
2. Significant accounting policies
2.1 Basis of preparation
The Consolidated Financial Statements of the Group have been prepared in
accordance with UK adopted international accounting standards, and applicable
Guernsey law, and reflect the following policies, which have been adopted and
applied consistently.
On 31 December 2020, IFRS as adopted by the European Union at that date was
brought into the UK law and became UK-adopted international accounting
standards, with future changes being subject to endorsement by the UK
Endorsement Board. The group transitioned to UK-adopted international
accounting standards in its consolidated financial statements on 1 April 2021.
There was no impact or changes in accounting from the transition.
The Consolidated Financial Statements have been prepared on a going concern
basis and under the historical cost basis, except for the following:
· Royalty investments - measured at fair value through
profit or loss
· Equity investments - measured at fair value through
profit or loss
· Royalty participation liabilities - measured at fair
value through profit or loss
The Directors consider that the Group has adequate financial resources to
enable it to continue operations for a period of no less than 12 months from
the date of approval of the financial statements. Accordingly, the Directors
believe that it is appropriate to continue to adopt the going concern basis in
preparing the financial statements.
Presentation of statement of cash flows
The Board considers cash flow to be the most important measure of the Group's
performance and subsequently has presented its Statement of Cash Flows before
the Statement of Comprehensive Income and Statement of Financial Position.
There have been no changes to the classification of any of the cash flows or
to the overall cash movements.
Presentation of statement of comprehensive income
In order to better reflect the activities of a royalty financing company, the
Statement of Comprehensive Income includes additional analysis, splitting the
Group's income by investment type.
2.2 New and amended standards adopted by the Group
A few amendments and interpretations of existing standards apply to the
Group's financial year but these did not have a significant impact on the
financial statements of the Company.
2.3 New standards and interpretations not yet adopted
At the date of authorisation of these Consolidated Financial Statements,
certain standards and interpretations were in issue but not yet effective and
have not been applied in these Consolidated Financial Statements. The
Directors do not expect that the adoption of these standards and
interpretations will have a material impact on the Consolidated Financial
Statements of the Group in future periods.
2.4 Going concern
In assessing the going concern basis of accounting the Directors have had
regard to the guidance issued by the Financial Reporting Council.
FY23 continued to present a challenging operating environment for Duke's
royalty partners. The impact of the Russia - Ukraine conflict continues to
have a significant impact on European economies as businesses battle against
interest rate hikes, supply chain issues, alongside a significant increase in
corporate power prices and a general shortage of labour. Furthermore, overall
consumer demand was affected by surging utility bills and food prices,
resulting in a general reduction of consumer discretionary spend.
Despite this, Duke's strategic focus on providing long-term, secured lending
to established and profitable owner-operated businesses has proven to be a
safeguard against these economic challenges. Moreover, the very low
amortisation payments of Duke's product in the early years have alleviated
some of the short-term liquidity concerns of our royalty partners, allowing
them to focus on managing their businesses rather than having to refinance
their debts during unfavourable times.
The directors continue to closely monitor the impact of these macroeconomic
headwinds on the Group's trading activities and cashflows, but do not consider
that there will be any significant effect on the ability of the Group to
continue in business and meet liabilities as they fall due.
During the year, the Group refinanced its debt facility, replacing the
previous facility with a new £100 million facility with Fairfax (as detailed
in the Directors' Report). At the 31 March 2023, the Group had £42,000,000 of
available headroom on the facility.
The Directors consider that the Company has adequate resources to continue in
operational existence for the next 24 months and beyond.
2.5 Basis of consolidation
Where the Company has control over an investee, it is classified as a
subsidiary. The Company controls an investee if all three of the following
elements are present: power over the investee, exposure to variable returns
from the investee, and the ability of the investor to use its power to affect
those variable returns. Control is reassessed whenever facts and circumstances
indicate that there may be a change in any of these elements of control.
All intra-group transactions, balances, income and expenses are eliminated on
consolidation. Accounting policies of subsidiaries have been changed where
necessary to ensure consistency with the policies adopted across the Group.
The "Group" is defined as the Company, its subsidiaries Duke Royalty UK
Limited, Capital Step Holdings Limited, Capital Step Investments Limited,
Capital Step Funding Limited and Capital Step Funding 2 Limited and The Duke
Royalty Employee Benefit Trust.
2.6 Segmental reporting
Operating segments are reported in a manner consistent with the internal
reporting provided to the chief operating decision-maker. The chief operating
decision-maker, who is responsible for allocating resources and assessing
performance of the operating segments, has been identified as the Board of
Directors, as a whole. The key measure of performance used by the Board to
assess the Group's performance and to allocate resources is operating
cashflow, as calculated under IFRS, and therefore no reconciliation is
required between the measure of performance used by the Board and that
contained in these Consolidated Financial Statements.
For management purposes, the Group's investment objective is to focus on one
main operating segment, which is to invest in a diversified portfolio of
royalty finance and related opportunities. At the end of the period the Group
has 15 investments into this segment and has derived income from them. Due to
the Group's nature, it has no customers.
2.7 Foreign currency
Functional and presentation currency
Items included in the Financial Statements of each of the Group's entities are
measured using the currency of the primary economic environment in which the
entity operates (the "functional currency"). The Consolidated Financial
Statements are presented in Pounds Sterling, which is also the functional
currency of the Company and its subsidiaries.
Transactions and balances
Foreign currency transactions are translated into the functional currency
using the exchange rates prevailing at the dates of the transactions. Foreign
currency assets and liabilities are translated into the functional currency
using the exchange rate prevailing at the reporting date.
Foreign exchange gains and losses relating to the financial assets and
liabilities carried at fair value through profit or loss are presented in the
Consolidated Statement of Comprehensive Income within 'royalty investment net
income', 'loan investment net income' and 'equity investment net income'.
Foreign exchange gains and losses relating to cash and cash equivalents are
presented in the Consolidated Statement of Comprehensive Income within 'Net
foreign currency gains / (losses)'. This has been presented below operating
costs as this best reflects the true nature of the balance.
2.8 Transaction costs
Transaction costs are costs incurred to acquire financial assets at fair value
through profit or loss. They include finders' fees, legal and due diligence
fees and other fees paid to agents and advisers. Transaction costs, when
incurred, are recognised immediately in profit or loss as an expense. Where
transaction costs are in respect of loans, these are offset using the
effective interest method.
2.9 Income tax
The income tax expense or credit for the period is the tax payable on the
current period's taxable income based on the applicable income tax rate for
each jurisdiction adjusted by changes in deferred tax assets and liabilities
attributable to temporary differences and to unused tax losses.
The current income tax charge is calculated on the basis of the tax laws
enacted or substantively enacted at the end of the reporting period in the
countries where the Company's subsidiaries operate and generate taxable
income. Management periodically evaluates positions taken in tax returns with
respect to situations in which applicable tax regulation is subject to
interpretation. It establishes provisions where appropriate on the basis of
amounts expected to be paid to the tax authorities.
Deferred income tax is provided in full, using the liability method, on
temporary differences arising between the tax bases of assets and liabilities
and their carrying amounts in the Consolidated Financial Statements. Deferred
income tax is determined using tax rates (and laws) that have been enacted or
substantively enacted by the end of the reporting period and are expected to
apply when the related deferred income tax asset is realised or the deferred
income tax liability is settled.
Deferred tax assets are recognised only if it is probable that future taxable
amounts will be available to utilise those temporary differences and losses.
Deferred tax assets and liabilities are offset when there is a legally
enforceable right to offset current tax assets and liabilities and when the
deferred tax balances relate to the same taxation authority. Current tax
assets and tax liabilities are offset where the entity has a legally
enforceable right to offset and intends either to settle on a net basis, or to
realise the asset and settle the liability simultaneously.
Current and deferred tax is recognised in profit or loss, except to the extent
that it relates to items recognised in other comprehensive income or directly
in equity. In this case, the tax is also recognised in other comprehensive
income or directly in equity, respectively.
2.10 Goodwill
Goodwill on acquisition of subsidiaries is included in intangible assets.
Goodwill is not amortised, but it is tested for impairment annually, or more
frequently if events or changes in circumstances indicate that it might be
impaired and is carried at cost less accumulated impairment losses. Gains and
losses on the disposal of the entity include the carrying amount of goodwill
relating to the entity sold.
Goodwill is allocated to cash-generating units for the purpose of impairment
testing. The allocation is made to those cash-generating units that are
expected to benefit from the business combination in which the goodwill arose.
The units or groups of units are identified at the lowest level at which
goodwill is monitored for internal management purposes.
2.11 Dividends
Dividends are recognised as a liability in the Group's financial statements in
the period in which they become obligations of the Group.
2.12 Financial instruments
Financial assets and financial liabilities are recognised in the Consolidated
Statement of Financial Position when the Group becomes a party to the
contractual provisions of the instrument. Financial assets and financial
liabilities are only offset and the net amount reported in the Consolidated
Statement of Financial Position and Consolidated Statement of Comprehensive
Income when there is a currently enforceable legal right to offset the
recognised amounts and the Group intends to settle on a net basis or realise
the asset and liability simultaneously.
a. Financial assets
The Group's financial assets are classified in the following measurement
categories:
· those to be measured subsequently at fair value through
profit or loss ("FVTPL"); and
· those to be measured at amortised cost
The classification depends on the entity's business model for managing the
financial assets and the contractual terms of the cash flows.
At initial recognition, the Group measures a financial asset at its fair
value, plus, in the case of a financial asset not at FVTPL, transaction costs
that are directly attributable to the acquisition of the financial asset.
Transaction costs of financial assets carried at FVTPL are expensed in profit
or loss.
Financial assets held at amortised cost
Assets that are held for collection of contractual cash flows where those cash
flows represent solely payments of principal and interest are measured at
amortised cost. These assets are subsequently measured at amortised cost using
the effective interest method.
The Group's financial assets held at amortised cost include loans receivable,
trade and other receivables and cash and cash equivalents.
Expected Credit Loss ("ECL") allowance for financial assets measured at
amortised cost
Impairment of financial assets is calculated using a forward-looking expected
credit loss (ECL) model. ECLs are an unbiased probability weighted estimate of
credit losses determined by evaluating a range of possible outcomes. They are
measured in a manner that reflects the time value of money and uses reasonable
and supportable information that is available without undue cost or effort at
the reporting date about past events, current conditions and forecasts of
future economic conditions.
The Group recognises an allowance for ECLs for all debt instruments not held
at fair value through profit or loss. Assets held at fair value through profit
and loss are not subject to impairment.
IFRS 9 establishes a three-stage approach for impairment of financial assets:
· Stage 1 - when a financial asset is first recognised,
it is assigned to Stage 1. If there is no significant increase in credit risk
from initial recognition, the financial asset remains in Stage 1. Stage 1 also
includes financial assets where the credit risk improved and the financial
asset has been reclassified back from Stage 2. For financial assets in Stage
1, a 12-month ECL is recognised;
· Stage 2 - when a financial asset has experienced a
significant increase in credit risk since initial recognition, the asset is
classified as Stage 2. Stage 2 also includes financial assets where the credit
risk improved and the financial asset has been reclassified back from Stage 3.
For financial assets in Stage 2, a lifetime ECL is recognised;
· Stage 3 - that where there is objective evidence of
impairment and the financial asset is considered to be in default, or
otherwise credit-impaired, it is moved to Stage 3. For financial assets in
Stage 3, a lifetime ECL is recognised and interest income is recognised on a
net basis.
In relation to the above
· Lifetime ECL is defined as ECLs that result from all
possible default events over the expected behavioural life of a financial
instrument
· 12-month ECL is defined as the portion of lifetime
credit loss that will result if a default occurs in the 12 months after the
reporting, weighted by the probability of that default occurring
The measurement of ECLs is primarily based on the product of the instrument's
probability of default ("PD"), loss given default ("LGD"), and exposure at
default ("EAD"), taking into account the value of any collateral held or other
mitigants of loss and including the impact of discounting using the effective
interest rate.
· The PD represents the likelihood of a borrower
defaulting on its financial obligation, either over the next 12 months
("12-month PD"), or over the remaining lifetime ("Lifetime PD") of the
obligation
· EAD is based on the amounts the Group expects to be
owed at the time of default, over the next 12 months ("12-month EAD") or over
the remaining lifetime ("Lifetime EAD")
· LGD represents the Group's expectation of the extent of
loss on a defaulted exposure
The ECL is determined by estimating the PD, LGD, and EAD for each individual
exposure. These three components are multiplied together and adjusted for the
likelihood of survival. This effectively calculates an ECL.
The measurement ECLs for each stage and the assessment of significant
increases in credit risk considers economic information about past events and
current conditions as well as reasonable and supportable forward-looking
information. When determining whether the credit risk profile has materially
increased, the Group specifically reviews the debt covenant positions of each
company. If the debt service coverage ratio falls below zero and the Group
does not have sufficient liquidity to cover 12 months of debt obligations, the
investment will be deemed to be in default and a lifetime ECL allowance will
be provided for.
As with any forecasts and economic assumptions, the projections and
likelihoods of occurrence are subject to a high degree of inherent uncertainty
and therefore the actual outcomes may be significantly different to those
projected. Other forward-looking considerations, such as the impact of any
regulatory, legislative or political changes, have also been considered, but
no adjustment has been made to the ECL for such factors. This is reviewed and
monitored for appropriateness on an annual basis.
Cash and cash equivalents
Cash and cash equivalents comprise current accounts and demand deposits and
other short-term highly liquid investments with an original maturity of three
months or less that are readily convertible to a known amount of cash and are
subject to an insignificant risk of changes in value.
Financial assets at FVTPL
Royalty investments are debt instruments classified at FVTPL under IFRS 9. The
return on these investments is linked to a fluctuating revenue stream and
thus, whilst the business model is to collect contractual cash flows, such
cash flows are not solely payments of principal and interest. Such assets are
recognised initially at fair value and remeasured at each reporting date. The
change in fair value is recognised in profit or loss and is presented within
'royalty investment income' in the Consolidated Statement of Comprehensive
Income. The fair value of these financial instruments is determined using
discounted cash flow analysis. Further details of the methods and assumptions
used in determining the fair value can be found in note 23.
Investments in equity instruments are classified at FVTPL. The Group
subsequently measures all equity investments at fair value and the change in
fair value is recognised in profit or loss and is presented within the 'equity
investment income' in the Consolidated Statement of Comprehensive Income.
Dividends from such investments are recognised in profit or loss when the
Group's right to receive payments is established.
Derecognition of financial assets
A financial asset (in whole or in part) is derecognised either (i) when the
Group has transferred substantially all the risks and rewards of ownership; or
(ii) when it has neither transferred nor retained substantially all the risks
and rewards and when it no longer has control over the assets or a portion of
the asset; or (iii) when the contractual right to receive cash flow has
expired. Any gain or loss on derecognition is taken to other income/expenses
in the Consolidated Statement of Comprehensive Income as appropriate.
b. Financial liabilities
The classification of financial liabilities at initial recognition depends on
the purpose for which the financial liability was issued and its
characteristics.
All financial liabilities are initially recognised at fair value. Unless
otherwise indicated the carrying amounts of the Group's financial liabilities
are approximate to their fair values.
Financial liabilities measured at amortised cost
These consist of borrowings and trade and other payables. These liabilities
are initially recognised at fair value, net of transaction costs incurred, and
subsequently carried at amortised cost using the effective interest rate
method.
Financial liabilities at FVTPL
Financial liabilities at FVTPL comprise royalty participation liabilities.
These liabilities arise under a contractual agreement between the Group and a
strategic partner for the provision of services in connection with the Group's
royalty financing arrangements. Under this agreement services are provided in
exchange for a percentage of gross royalties' receivable. These instruments
are classified at FVTPL on the basis that the liability is linked to the
Group's royalty investments. Such liabilities are recognised initially at fair
value with the costs being recorded immediately in profit or loss as 'royalty
participation fees' and remeasured at each reporting date in order to avoid an
accounting mismatch. The change in fair value is recognised in profit or loss
and presented within 'royalty investment income'. The fair value of these
financial instruments is determined using discounted cash flow analysis.
Further details of the methods and assumptions used in determining the fair
value can be found in note 23.
Derecognition of financial liabilities
A financial liability (in whole or in part) is derecognised when the Group has
extinguished its contractual obligations, it expires or is cancelled. Any gain
or loss on derecognition is taken to other income/expenses in the Consolidated
Statement of Comprehensive Income.
c. Equity Instruments
Financial instruments issued by the Group are treated as equity if the holder
has only a residual interest in the assets of the Group after the deduction of
all liabilities. The Company's Ordinary Shares are classified as equity
instruments.
Incremental costs directly attributable to the issue of new shares are shown
in equity as a deduction from proceeds.
2.13 Share-based payments
The Group operates an equity settled Share Option Plan and a Long-Term
Incentive Plan for its Directors and key advisers.
The fair value of awards granted under the above plans are recognised in
profit or loss with a corresponding increase in equity. The total amount to be
expensed is determined by reference to the fair value of the awards granted:
· including any market performance conditions (e.g., the
entity's share price)
· excluding the impact of any service and non-market
performance vesting conditions (e.g., increase in cash available for
distribution, remaining a director for a specified time period); and
· including the impact of any non-vesting conditions
The total expense is recognised over the vesting period, which is the period
over which all of the specified vesting conditions are to be satisfied. At the
end of each reporting period, the Group revises its estimates of the number of
options that are expected to vest based on the non-market vesting and service
conditions. It recognises the impact of the revision to original estimates, if
any, in profit or loss, with a corresponding adjustment to equity.
The Group also settles a portion of expenses by way of share-based payments.
These expenses are settled based on the fair value of the service received as
an expense with the corresponding amount increasing equity. All expenses
recognised in the year in relation to the Group's Share Option and Long-Term
Incentive Plan schemes are recognised through the share-based payment reserve.
2.14 Reserves
Equity comprises the following:
· Share capital represents the nominal value of equity
shares in issue
Other reserves comprises the following:
· Warrant reserve was created in connection with the
issue of share warrants. Further warrants were issued during the year ended 31
March 2023. These allow the owner to subscribe for a fixed number of equity
shares at a fixed price, and have therefore been classified as equity in
accordance with IAS 32 paragraph 16.
· Share-based payment reserve represents equity-settled
share-based employee remuneration as detailed in note 2.13
· Retained earnings represents retained profits
3. Critical accounting estimates
The preparation of the Consolidated Financial Statements in conformity with
IFRS requires management to make estimates and assumptions that affect the
application of policies and the reported amounts of assets and liabilities,
income and expenses. The estimates and associated assumptions are based on
historical experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis of the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised, if the revision affects only that period, or in the
period of revision and future periods, if the revision affects both current
and future periods. The following estimates and assumptions that may cause a
material adjustment to the carrying amount of assets and liabilities are:
Fair value of royalty investments
Royalty investments are valued using a discounted cash flow analysis. The
discount rate used in these valuations has been estimated to take account of
market interest rates and the credit worthiness of the investee. Revenue
growth has been estimated by the Directors and is based on unobservable market
inputs.
Where the royalty investment contains a buy-back clause, the Directors have
assessed the likelihood of this occurring. Where occurrence of the buy-back is
deemed likely, this is built into the discounted cash flow at the appropriate
point.
These assumptions are reviewed semi-annually. The Directors believe that the
applied valuation techniques and assumptions used are appropriate in
determining the fair value of the royalty investments and have made
adjustments to the discount rates and estimated revenue growth where
necessary. Further details of the carrying values, methods, assumptions and
sensitivities used in determining the fair value can be found in note 23.
Fair value of royalty participation liabilities
The payments falling due under the Group's contract for royalty participation
fees are directly linked to the Group's royalty investments and thus the same
assumptions have been applied in arriving at the fair value of these
liabilities. The Directors have considered whether any increase in discount
rate is required to represent the Group's credit risk as the payments are made
by the Group rather than the investee and have concluded that none is required
since payment under the contract is only due once the Group has received the
gross amounts from the investee. Further details of the methods, assumptions
and sensitivities used in determining the fair value can be found in note 23.
Fair value of equity investments
The Group's equity investments are not traded in an active market and thus the
fair value of the instruments is determined using valuation techniques. The
Group make assumptions based on market conditions at the end of each reporting
period. The key estimates that the Directors have made in arriving at the fair
values are the price/earnings multiples to be applied to the investee
entities' profits. These multiples have been estimated based on market
information for similar types of companies. The carrying value of equity
investments are disclosed in Note 11. Further details of the methods,
assumptions and sensitivities used in determining the fair value can be found
in note 23.
4. Auditor's remuneration
2023 2022
£000 £000
Audit of the Consolidated Financial Statements 105 75
5. Administration and personnel
The table below splits out administration and personnel costs.
2023 2022
£000 £000
Support services administration fees 518 449
Directors' fees 1,012 730
Investment committee fees 108 107
Personnel costs 989 774
2,627 2,060
6. Finance costs
2023 2022
£000 £000
Interest payable on borrowings 3,861 1,499
Non-utilisation fees 194 350
Deferred finance costs released to P&L 1,558 147
Other finance costs 31 -
5,644 1,996
7. Income tax
The Company has been granted exemption from Guernsey taxation. The Company's
subsidiaries in the UK are subject to taxation in accordance with relevant tax
legislation.
2023 2022
£000 £000
Current tax
Income tax expense 886 980
Deferred tax
Increase in deferred tax assets (44) 3
Decrease in deferred tax liabilities - (1)
Total deferred tax benefit (44) 2
Income tax expense 842 982
Factors affecting income tax expense for the year
Profit on ordinary activities before tax 20,434 21,373
Guernsey taxation at 0% (2022: 0%) - -
Overseas tax charges at effective rate of 4.12% (2021: 13.14%) 842 982
Income tax expense 842 982
8. Earnings per share
2023 2022
Total comprehensive income (£000) 19,592 20,391
Weighted average number of Ordinary Shares in issue, excluding treasury shares 397,991 342,822
(000s)
Basic earnings per share (pence) 4.92 5.95
2023 2022
Total comprehensive income (£000) 19,592 20,391
Diluted weighted average number of Ordinary Shares in issue, excluding 397,991 342,822
treasury shares (000s)
Diluted earnings per share (pence) 4.92 5.95
Basic earnings per share is calculated by dividing total comprehensive income
for the period by the weighted average number of shares in issue throughout
the period, excluding treasury shares (see Note 17).
Diluted earnings per share represents the basic earnings per share adjusted
for the effect of dilutive potential shares issuable on exercise of share
options under the Company's share-based payment schemes, weighted for the
relevant period.
All share options, warrants and Long-Term Incentive Plan awards in issue are
not dilutive at the year-end as the exercise prices were above the average
share price for the period. However, these could become dilutive in future
periods.
Adjusted earnings per share
Adjusted earnings represent the Group's underlying performance from core
activities. Adjusted earnings is the total comprehensive income adjusted for
unrealised and non-core fair value movements, non-cash items and
transaction-related costs, including royalty participation fees, together with
the tax effects thereon. Given the sensitivity of the inputs used to determine
the fair value of its investments, the Group believes that adjusted earnings
is a better reflection of its ongoing financial performance.
Valuation and other non-cash movements such as those outlined are not
considered by management in assessing the level of profit and cash generation
of the Group. Additionally, IFRS 9 requires transaction-related costs to be
expensed immediately whilst the income benefit is over the life of the asset.
As such, an adjusted earnings measure is used which reflects the underlying
contribution from the Group's core activities during the year.
2023 2022
£000 £000
Total comprehensive income for the period 19,592 20,391
Unrealised fair value movements (9,111) (10,431)
Impairment loss on loan investments 20 72
Share-based payments 969 930
Transactions costs net of costs reimbursed 686 1,746
Tax effect of the adjustments above at Group effective rate 306 350
Adjusted earnings 12,462 13,058
2023 2022
Adjusted earnings for the year (£000) 12,462 13,058
Weighted average number of Ordinary Shares in issue, excluding treasury shares 397,991 342,822
(000s)
Adjusted earnings per share (pence) 3.13 3.81
2023 2022
Diluted adjusted earnings for the year (£000) 12,462 13,058
Diluted weighted average number of Ordinary Shares in issue, excluding 397,991 342,822
treasury shares (000s)
Diluted adjusted earnings per share (pence) 3.13 3.81
9. Royalty investments
Royalty investments are financial assets held at FVTPL that relate to the
provision of royalty capital to a diversified portfolio of companies.
31-Mar-23 31-Mar-22
£000 £000
At 1 April 160,479 85,301
Additions 23,809 74,586
Buybacks - (2,939)
Profit on financial assets at FVTPL 7,045 3,531
As at 31 March 191,333 160,479
Royalty investments are comprised of:
31-Mar-23 31-Mar-22
£000 £000
Non-Current 158,540 139,648
Current 32,793 20,831
191,333 160,479
Royalty investment net income on the face of the consolidated statement of
comprehensive income comprises:
2023 2022
£000 £000
Royalty interest 21,364 13,987
Royalty premiums - 714
Gain on royalty assets at FVTPL 7,045 3,531
Loss on royalty liabilities at FVTPL (143) (195)
Royalty investment net income 28,266 18,037
All financial assets held at FVTPL are mandatorily measured as such.
The Group's royalty investment assets comprise royalty financing agreements
with 15 (31 March 2022:13) investees. Under the terms of these agreements the
Group advances funds in exchange for annualised royalty distributions. The
distributions are adjusted based on the change in the investees' revenues,
subject to a floor and a cap. The financing is secured by way of fixed and
floating charges over certain of the investees' assets. The investees are
provided with buyback options, exercisable at certain stages of the
agreements.
10. Loan investments
Loan investments are financial assets held at amortised cost with the
exception of the £2.2 million loan issued at 0% interest. The impact of
discounting is immaterial to the financial statements. The below table shows
both the loans at amortised cost and fair value.
31-Mar-23 31-Mar-22
£000 £000
1 April 4,172 4,950
Additions 2,500 3,192
Buybacks (2,000) (3,950)
ECL allowance (20) (20)
Net foreign currency movement - -
As at 31 March 4,652 4,172
The Group's loan investments comprise secured loans advanced to two entities
(2022 - two) in connection with the Group's royalty investments.
The loans comprise fixed rate loans of £4,652,000 (31 March 2022:
£4,172,000) which bear interest at rates of between 0% and 15% (2022: 0% and
15%). The Group has no variable rate loans at the year end (2022: no variable
rate loans at year end). The total interest receivable during the period was
£339,074 (31 March 2022: £533,000).
The loan investments mature as follows:
31-Mar-23 31-Mar-22
£000 £000
In less than one year - 1,000
In one to two years 4,652 -
In two to five years - 3,172
4,652 4,172
Loan investment net income on the face of the consolidated statement of
comprehensive income comprises:
2023 2022
£000 £000
Loan Interest charged 339 365
Loan premiums on exit - 168
339 533
ECL Analysis
The measurement of ECLs is primarily based on the product of the instrument's
probability of default ("PD"), loss given default ("LGD"), and exposure at
default ("EAD"). The Group analyses a range of factors to determine the credit
risk of each investment. These include, but are not limited to:
· liquidity and cash flows of the underlying businesses
· security strength
· covenant cover
· balance sheet strength
If there is a material change in these factors, the weighting of either the
PD, LGD or EAD increases, thereby increasing the ECL impairment.
The disclosure below presents the gross and net carrying value of the Group'
loan investments by stage:
Gross carrying amount Allowance for ECLs Net
Carrying amount
As at 31 March 2023 £000 £000 £000
Stage 1 4,692 (40) 4,652
Stage 2 - - -
Stage 3 - - -
4,692 (40) 4,652
Gross carrying amount Allowance for ECLs Net
Carrying amount
As at 31 March 2022 £000 £000 £000
Stage 1 4,192 (20) 4,172
Stage 2 - - -
Stage 3 - - -
4,192 (20) 4,172
Under the ECL model introduced by IFRS 9, impairment provisions are driven by
changes in credit risk of instruments, with a provision for lifetime expected
credit losses recognised where the risk of default of an instrument has
increased significantly since initial recognition.
The credit risk profile of the investments has not increased materially and
they remain Stage 1 assets. Minor expected credit losses have been charged for
the Stage 1 assets.
The following table analyses Group's provision for ECL's by stage:
Stage 1 Stage 2 Stage 3 Total
£000 £000 £000 £000
Expected credit losses on loan investments in year 20 - - 20
Expected credit losses on other receivables in year 52 - - 52
Carrying value at 31 March 2022 72 - - 72
Expected credit losses on loan investments in year 22 - - 22
Refinanced loans (2) - - (2)
Carrying value at 31 March 2023 92 - - 92
11. Equity investments
Equity investments are financial assets held at FVTPL.
31-Mar-23 31-Mar-22
£000 £000
At 1 April 10,820 3,495
Additions 500 530
Repayments - (300)
Realised gains on sale of equity investment - (2,583)
Gain on equity investments at FVTPL 2,209 9,678
As at 31 March 13,529 10,820
The Group's equity investments comprise unlisted shares and warrants in eleven
of its royalty investment companies (31 March 2022: nine).
The Group also still holds two (31 March 2022: two) unlisted investments in
mining entities from its previous investment objectives. The Board does not
consider there to be any future cash flows from the remaining mining
investments and they are fully written down to nil value.
Equity investment net income on the face of the consolidated statement of
comprehensive income comprises:
2023 2022
£000 £000
Unrealised gain on equity assets at FVTPL 2,209 7,095
Realised gain on equity assets at FVTPL - 2,583
Dividend income 3 -
2,212 9,678
12. Royalty debt liabilities
Royalty debt liabilities are financial liabilities held at fair value through
profit and loss.
31-Mar-23 31-Mar-22
£000 £000
At 1 April 1,111 1,031
Additions - -
Repayments - -
Payments made (112) (115)
Gain on royalty liabilities at fair value through profit and loss 143 195
As at 31 March 1,142 1,111
Royalty investment liabilities are comprised of:
31-Mar-23 31-Mar-22
£000 £000
Non-Current 988 951
Current 154 160
1,142 1,111
13. Trade and other receivables
31-Mar-23 31-Mar-22
£000 £000
Current
Prepayments and accrued income 59 53
Other receivables 2,231 -
2,290 53
Non-current
Other receivables - 2,141
2,290 2,194
14. Trade and other payables
31-Mar-23 31-Mar-22
£000 £000
Current
Trade payables 6 11
Transaction costs 315 233
Accruals and deferred income 112 179
433 423
Non-current
Transaction costs 1,314 1,067
1,747 1,490
15. Borrowings
31-Mar-23 31-Mar-22
£000 £000
Current - accrued interest 441 362
Non-current 53,930 47,740
54,371 48,102
In January 2023, the Group entered into a new credit facility agreement with
Fairfax Financial Holdings Limited and certain of its subsidiaries ("Fairfax")
and issued Fairfax 41,615,134 warrants. Refer to Note 18 for details. The
facility term is up to £100m to replace Duke's existing £55m million term
and revolving facilities. The credit facility has a five-year term, expiring
in January 2028 with a bullet repayment on expiry and no amortisation payments
during the five-year term. Furthermore, the interest rate is equal to SONIA
plus 5.00% per annum, which represents a 225bps improvement on Duke's previous
rate of SONIA plus 7.25%.
The Group has adopted Interest Rate Benchmark Reform - IBOR 'phase 2'
(Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and 16). Applying the practical
expedient introduced by the amendments, when the benchmarks affecting the
Group's loans are replaced, the adjustments to the contractual cash flows will
be reflected as an adjustment to the effective interest rate. Therefore, the
replacement of the loans' benchmark interest rate will not result in an
immediate gain or loss recorded in profit or loss, which may have been
required if the practical expedient was not available or adopted.
At 31 March 2023, £42,000,000 was undrawn on the facility (31 March 2022:
£6,800,000).
At the date of extinguishment of the previous facility, capitalised loan issue
fees of £350,000 were outstanding. These fees were immediately charged to the
income statement. Further fees of £1,439,000 were capitalised against the new
credit facility. At 31 March 2023, £1,391,000 (31 March 2022: £460,000) of
unamortised fees remained outstanding.
The table below sets out an analysis of net debt and the movements in net debt
for the year ended 31 March 2023 and prior year.
Interest Payable Borrowings
£000 £000
At 1 April 2022 362 47,7340
Cash movements
Loan advanced - 71,250
Loan repaid - (61,450)
Deferred finance costs paid - (2,347)
Interest paid (3,976) -
Non-cash movements
Deferred finance costs released to P&L - old credit facility - 1,416
Deferred finance costs released to P&L - new credit facility - 92
Issue of warrants - (2,771)
Interest charged 4,055 -
At 31 March 2023 441 53,930
Interest Payable Borrowings
£000 £000
At 1 April 2021 161 17,103
Cash movements
Loan advanced - 38,200
Loan repaid - (7,500)
Deferred finance costs paid - (181)
Interest paid (1,649) -
Non-cash movements
Deferred finance costs released to P&L - new credit facility - 118
Interest charged 1,850 -
At 31 March 2022 362 47,740
16. Goodwill
Goodwill
£000
Opening and closing net book value at 1 April 2021, 31 March 2022 and 31 March 203
2023.
The goodwill has not been assessed for impairment on the basis of materiality.
17. Share capital
External Shares Treasury Shares Total shares £000
No. No. No.
Allotted, called up and fully paid
At 1 April 2021 247,052 10,855 257,907 120,870
Shares issued for cash during the period 100,000 - 100,000 35,000
Share issuance costs - - - (1,936)
PSA shares vested during year 1,457 (1,457) - -
Shares issued to Employee Benefit Trust during the period - 792 792 -
Shares issued to key advisers as remuneration 105 - 105 40
At 31 March 2022 348,614 10,190 358,804 153,974
Shares issued for cash during the year 57,143 - 57,143 20,000
Share issuance costs - - - (1,115)
PSA shares vested during year 1,800 (1,800) - -
Shares issued to Employee Benefit Trust during the year - 1,382 1,382 -
Shares issued to directors and key advisors as remuneration 205 - 205 80
At 31 March 2023 407,762 9,772 417,534 172,939
There is a single class of shares. There are no restrictions on the
distribution of dividends and the repayment of capital with respect to
externally held shares. The shares held by The Duke Royalty Employee Benefit
Trust are treated as treasury shares. The rights to dividends and voting
rights have been waived in respect of these shares.
18. Equity-settled share-based payments
Warrant reserve
The following table shows the movements in the warrant reserve during the
year:
Warrants
No. (000) £000
At 1 April 2022 4,375 265
Issued during the year 41,615 2,771
Lapsed during the year (2,000) -
At 31 March 2023 43,990 3,036
In January 2023, Duke issued 41,615,134 warrants to Fairfax. The warrants
expire in January 2028 and have an exercise price of 45 pence. As per IFRS 2,
the warrants have been valued using the Black Scholes model. A total expense
of £2,771,000 has been capitalised and will be amortised over the life of the
warrants. In the year to 31 March 2023, an expense of £92,000 (2022: £nil)
was recognised through finance costs in relation to the warrants.
At 31 March 2023, 43,990,000 (31 March 2022: 4,375,000) warrants were
outstanding and exercisable at a weighted average exercise price of 45 pence
(31 March 2022: 46 pence). The weighted average remaining contractual life of
the warrants outstanding was 4.56 years (31 March 2022: 1.00 years).
Share-based payment reserve
The following table shows the movements in the share-based payment reserve
during the period:
Share options LTIP Total
£000 £000 £000
At 1 April 2021 136 1,412 1,548
LTIP awards - 930 930
At 31 March 2022 136 2,342 2,478
LTIP awards - 969 969
At 31 March 2023 136 3,311 3,447
Share option scheme
The Group operates a share option scheme ("the Scheme"). The Scheme was
established to incentivise Directors, staff and key advisers and consultants
to deliver long-term value creation for shareholders.
Under the Scheme, the Board of the Company will award, at its sole discretion,
options to subscribe for Ordinary Shares of the Company on terms and at
exercise prices and with vesting and exercise periods to be determined at the
time. However, the Board of the Company has agreed not to grant options such
that the total number of unexercised options represents more than four per
cent of the Company's Ordinary Shares in issue from time to time. Options vest
immediately and lapse five years from the date of grant.
At 31 March 2023, 200,000 options (31 March 2022: 200,000) were outstanding
and exercisable at a weighted average exercise price of 50 pence (31 March
2022: 50 pence). The weighted average remaining contractual life of the
options outstanding at the year-end was 0.50 year (31 March 2022: 1.50 year).
Share Options
No. (000)
At 1 April 2021 and 31 March 2022 200
Lapsed during the year -
At 31 March 2023 200
Long Term Incentive Plan
Under the rules of the Long-Term Incentive Plan ("LTIP") the Remuneration
Committee may grant Performance Share Awards ("PSAs") which vest after a
period of three years and are subject to various performance conditions. The
LTIP awards will be subject to a performance condition based 50 per cent on
total shareholder return ("TSR") and 50 per cent on total cash available for
distribution ("TCAD per share"). TSR can be defined as the returns generated
by shareholders based on the combined value of the dividends paid out by the
Company and the share price performance over the period in question. Upon
vesting the awards are issued fully paid.
The fair value of the LTIP awards consists of (a) the fair value of the TSR
portion; and (b) the fair value of the TCAD per share portion. Since no
consideration is paid for the awards, the fair value of the awards is based on
the share price at the date of grant, as adjusted for the probability of the
likely vesting of the performance conditions. Since the performance condition
in respect of the TSR portion is a market condition, the probability of
vesting is not revisited following the date of grant. The probability of
vesting of the TCAD per share portion, containing a non-market condition, is
reassessed at each reporting date. The resulting fair values are recorded on a
straight-line basis over the vesting period of the awards.
On 31 October 2019, 2,525,000 PSAs were granted to Directors and key personnel
with a fair value of £842,280. An expense of £185,927 was recognised in
Administration and Personnel costs in the Consolidated Statement of
Comprehensive Income.
On 1 October 2020, 6,665,000 PSAs were granted to Directors and key personnel
with a fair value of £1,093,478. An expense of £364,493 was recognised in
Administration and Personnel costs in the Consolidated Statement of
Comprehensive Income.
On 3 January 2021, 1,000,000 PSAs were granted to Directors and key personnel
with a fair value of £164,063. An expense of £54,688 was recognised in
Administration and Personnel costs in the Consolidated Statement of
Comprehensive Income.
On 1 October 2021, 2,108,000 PSAs were granted to Directors and key personnel
with a fair value of £671,926. An expense of £223,771 was recognised in
Administration and Personnel costs in the Consolidated Statement of
Comprehensive Income.
On 1 October 2022, 3,954,700 PSA's were granted to Directors and key personnel
with a fair value of £840,376. An expense of £139,935 was recognised in
Administration and Personnel costs in the Consolidated Statement of
Comprehensive Income.
At 31 March 2023, 13,727,700 (31 March 2022:12,298,000) PSAs were outstanding.
The weighted average remaining vesting period of these awards outstanding was
1.2 years (2022 - 1.5 years).
Other share-based payments
During the year ended 31 March 2023, the Company issued 205,128 (2022:
104,576) shares to members of the Investment Committee in recognition of the
significant contribution made during the previous financial year and for
voluntarily forgoing service fees. The fair value of the shares was determined
to be £80,000 being the share price at the date of the awards. The expense
was recognised in full in the Consolidated Statement of Comprehensive Income
during that year.
19. Distributable reserves
Pursuant to the Companies (Guernsey) Law, 2008 (as amended), all reserves
(including share capital) can be designated as distributable. However, in
accordance with the Admission Document, the Company shall not make any
distribution of capital profits or capital reserves except by means of
capitalisation issues in the form of fully paid Ordinary Shares or issue
securities by way of capitalisation of profits or reserves except fully paid
Ordinary Shares issued to the holders of its Ordinary Shares.
20. Dividends
The following interim dividends have been recorded in the periods to 31 March
2022 and 31 March 2023:
Dividend per Dividends
share payable
pence/share £000
Record date Payment date
26 March 2021 12 April 2021 0.55 1,359
25 June 2021 12 July 2021 0.55 1,909
24 September 2021 12 October 2021 0.55 1,909
24 December 2021 12 January 2022 0.60 2,093
Dividends paid for the period ended 31 March 2022 7,270
Payment date
25 March 2022 12 April 2022 0.70 2,440
1 July 2022 12 July 2022 0.70 2,842
30 September 2022 12 October 2022 0.70 2,842
23 December 2022 12 January 2023 0.70 2,855
Dividends paid for the period ended 31 March 2023 10,979
A further quarterly dividend was paid post year end, refer to Note 25 for
details.
Rights to dividends have been waived in respect of shares held by the Group's
Employee Benefit Trust (see note 17).
21. Deferred tax
The temporary differences for deferred tax are attributable to:
Royalty investment Equity investment Tax losses Total
£000s £000s £000s £000s
1 April 2021 158 - - 158
Credited to profit & loss (2) - - (2)
At 31 March 2022 156 - - 156
Charged to profit & loss 44 - - 44
At 31 March 2023 200 - - 200
A deferred tax asset has been recognised as it is expected that future
available taxable profits will be available against which the Group can use
against the current year tax losses.
22. Related parties
Directors' fees
The following fees were payable to the Directors during the period:
Basic fees Share Annual bonus Total Basic fees Share Annual bonus Total
based payment based payment
2023 2023 2023 2023 2022 2022 2022 2022
£000 £000 £000 £000 £000 £000 £000 £000
Non-Executive
N Birrell 40 - - 40 38 - - 38
M Wilms 30 - - 30 4 - - 4
M Wrigley 30 - - 30 29 - - 29
Executive
N Johnson 240 248 240 728 233 269 108 610
C Cannon Brookes 216 216 216 648 210 216 108 534
556 464 456 1,476 514 485 216 1,215
Fees relating to Charles Cannon Brookes are paid to Arlington Group Asset
Management Limited.
Directors' fees include the following expenses relating to awards granted
under the Group's Long Term Incentive Plan (see note 18):
2023 2022
£000 £000
N Johnson 248 269
C Cannon Brookes 216 216
464 485
At 31 March 2023, no Directors' fees were outstanding (2022: no fees
outstanding).
Investment Committee fees
The Group's Investment Committee assists in analysing and recommending
potential royalty transactions and its members are considered to be key
management along with the Directors.
The following fees were payable to the members of the Investment Committee
during the year:
2023 2022
£000 £000
A Carragher 20 20
J Romeo 20 20
J Cochrane 20 20
J Webster 113 109
173 169
Investment Committee fees include the following expenses relating to shares
issued as remuneration (see note 18):
2023 2022
£000 £000
A Carragher - 20
J Romeo - 20
J Cochrane - 20
J Webster - 20
- 80
Investment Committee fees include the following expenses relating to awards
granted under the Group's Long Term Incentive Plan (see note 18):
2023 2022
£000 £000
J Webster 37 62
Support services administration fees
The following amounts were payable to related parties during the year in
respect of support services fees:
2023 2022
£000 £000
Abingdon Capital Corporation 425 363
Arlington Group Asset Management Limited 93 85
518 448
Support Service Agreements with Abingdon Capital Corporation ("Abingdon"), a
company of which Neil Johnson is a director, and Arlington Group Asset
Management Limited ("Arlington"), a company of which Charles Cannon Brookes is
a director, were signed on 16 June 2015. The services to be provided by both
Abingdon and Arlington include global deal origination, vertical partner
relationships, office rental and assisting the Board with the selection,
execution and monitoring of royalty partners and royalty performance. Abingdon
fees also includes fees relating to remuneration of staff residing in North
America.
Share options and LTIP awards
The Group's related parties, either directly or beneficially, held share
options issued under the Group's share option scheme and Long-Term Incentive
Plan as follows:
Share options LTIP awards
2023 2022 2023 2022
No. No. No. No.
Neil Johnson - - 3,382 2,821
Charles Cannon Brookes - - 3,144 2,474
Nigel Birrell - - - -
Justin Cochrane - - - -
Jim Webster - - 375 590
Dividends
The following dividends were paid to related parties:
2023 2022
£000 £000
N Johnson(1) 142 97
C Cannon Brookes(2) 212 141
N Birrell 35 23
M Wrigley 1 1
J Webster 9 2
J Cochrane 28 21
A Carragher 15 11
J Romeo 4 3
(1) Includes dividends paid to Abinvest Corporation, a wholly owned subsidiary
of Abingdon
(2) Includes dividends paid to Arlington Group Asset Management
23. Fair value measurements
Fair value hierarchy
IFRS 13 requires disclosure of fair value measurements by level of the
following fair value hierarchy:
Level 1: Inputs are quoted prices (unadjusted) in active markets for identical
assets and liabilities that the entity can readily observe.
Level 2: Inputs are inputs other than quoted prices included within Level 1
that are observable for the asset, either directly or indirectly.
Level 3: Inputs that are not based on observable market date (unobservable
inputs).
The Group has classified its financial instruments into the three levels
prescribed as follows:
31-Mar-23 31-Mar-22
Level 3 Level 3
£000 £000
Financial assets
Financial assets at FVTPL
- Royalty investments 191,333 160,479
- Equity investments 13,529 10,820
204,862 171,299
Financial liabilities
Financial liabilities at FVTPL
- Royalty debt liabilities 1,142 1,111
1,142 1,111
The following table presents the changes in level 3 items for the years ended
31 March 2023 and 31 March 2022:
Financial Financial
assets liabilities Total
£000 £000 £000
At 1 April 2021 88,796 (1,031) 87,765
Additions 75,116 - 75,116
Repayments (5,822) - (5,822)
Royalty income received (18,037) - (18,037)
Royalty participation liabilities paid - 115 115
Net change in fair value 31,246 (195) 31,051
At 31 March 2022 171,299 (1,111) 170,188
Additions 24,309 - 24,309
Royalty income received (28,266) - (28,266)
Royalty participation liabilities paid - 112 112
Net change in fair value 37,520 (143) 37,377
At 31 March 2023 204,862 (1,142) 203,720
Valuation techniques used to determine fair values
The fair value of the Group's royalty financial instruments is determined
using discounted cash flow analysis and all the resulting fair value estimates
are included in level 3. The fair value of the equity instruments is
determined applying an EBITDA multiple to the underlying businesses forward
looking EBITDA. All resulting fair value estimates are included in level 3.
Valuation processes
The main level 3 inputs used by the Group are derived and evaluated as
follows:
Annual adjustment factors for royalty investments and royalty participation
liabilities
These factors are estimated based upon the underlying past and projected
performance of the royalty investee companies together with general market
conditions.
Discount rates for financial assets and liabilities
These are initially estimated based upon the projected internal rate of return
of the royalty investment and subsequently adjusted to reflect changes in
credit risk determined by the Group's Investment Committee.
EBITDA multiples
These multiples are based on comparable market transactions
Forward looking EBITDA
These are estimated based on the projected underlying performance of the
royalty investee companies together.
Changes in level 3 fair values are analysed at the end of each reporting
period and reasons for the fair value movements are documented.
Valuation inputs and relationships to fair value
The following summary outlines the quantitative information about the
significant unobservable inputs used in level 3 fair value measurements:
Royalty investments
The unobservable inputs are the annual adjustment factor and the discount
rate. The range of annual adjustment factors used is -6.0% to 6.0% (2022:
1.9%% to 6.0%) and the range of risk-adjusted discount rates is 14.7% to
17.70% (2022: 14.8% to 17.35%).
An increase in the annual revenue growth rates (subject to the collars set
under the terms of the royalty financing agreements) of 5% would increase the
fair value by £929,000 (2022: £891,000).
A reduction in the discount rate of 25 basis points would increase the fair
value by £2,289,000 (2022: £2,302,000).
A decrease in the annual revenue growth rates (subject to the collars set
under the terms of the royalty financing agreements) of 5% would decrease the
fair value by £1,263,000 (2022: £1,296,000).
An increase in the discount rate of 25 basis points would decrease the fair
value by £2,230,000 (2022: £2,232,000).
Equity investments
The unobservable inputs are the EBITDA multiples and forward looking EBITDA.
The range of EBITDA multiples used is 5.3x to 10.0x (5.0x to 7.8x).
An increase in the EBITDA multiple of 25 basis points would increase fair
value by £1,378,000 (2022: £1,560,000)
A decrease in the EBITDA multiple of 25 basis points would decrease fair value
by £1,378,000 (2022: £1,560,000)
An increase in the forward looking EBITDA of 5% would increase the fair value
by £1,575,000 (2022: £1,695,000)
A decrease in the forward looking EBITDA of 5% would decrease fair value by
£1,575,000 (2022: £1,695,000)
Royalty participation instruments
The unobservable inputs are the annual adjustment factor and the discount rate
used in the fair value calculation of the royalty investments. The range of
annual adjustment factors used is -0.37% to 6.0% (2022: 1.9% to 6.0%) and the
range of risk-adjusted discount rates is 16.3% to 17.3% (2022: 16.3% to
17.3%).
An increase in the annual adjustment factor (subject to the collars set under
the terms of the royalty financing agreements) of 5% would increase the fair
value of the liability by £5,000 (2022: £6,000).
A reduction in the discount rate of 25 basis points would increase the fair
value of the liability by £9,000 (2022: £14,000).
A decrease in the annual adjustment factor (subject to the collars set under
the terms of the royalty financing agreements) of 5% would decrease the fair
value of the liability by £9,000 (2022: £10,000).
An increase in the discount rate of 25 basis points would decrease the fair
value of the liability by £14,000 (2022: £13,000).
24. Financial risk management
The Group's royalty financing activities expose it to various types of risk
that are associated with the investee companies to which it provides royalty
finance. The most important types of financial risk to which the Group is
exposed are market risk, liquidity risk and credit risk. Market risk includes
price risk, foreign currency risk and interest rate risk. The Board of
Directors has overall responsibility for risk management and the policies
adopted to minimise potential adverse effects on the Group's financial
performance.
Principal financial instruments
The principal financial instruments used by the Group from which financial
instrument risk arises, are as follows:
31-Mar-23 31-Mar-22
£000 £000
Financial assets held at FVTPL
Royalty investments 191,333 160,479
Equity investments 13,529 10,820
Total financial assets held at FVTPL 204,862 171,299
Financial assets held at amortised cost
Loan investments 4,652 4,172
Cash and cash equivalents 8,939 5,707
Trade and other receivables 2,290 2,194
Total financial assets held at amortised cost 15,881 12,073
Total financial assets 220,743 183,372
Financial liabilities held at amortised cost
Bank borrowings (54,371) (48,102)
Trade and other payables (1,747) (1,490)
Total financial liabilities held at amortised cost (56,118) (49,592)
Financial liabilities held at FVTPL (1,142) (1,111)
Total financial liabilities (57,260) (50,703)
The policies and processes for measuring and mitigating each of the main risks
are described below.
Market risk
Market risk comprises foreign exchange risk, interest rate risk and other
price risk.
Foreign exchange risk
Currency risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in foreign currency
exchange rates. The functional and presentation currency of the Group is
Sterling.
The Group is exposed to foreign exchange risk arising from foreign currency
transactions, primarily with respect to the Euro. Foreign exchange risk arises
from future commercial transactions in recognised assets and liabilities
denominated in a currency that is not the functional currency of the Company
and its subsidiary.
The Board monitors foreign exchange risk on a regular basis. The Group's
exposure to this risk is outlined below.
The Group's exposure to foreign currency risk at the end of the reporting
period was as follows:
31-Mar-23 31-Mar-23 31-Mar-23 31-Mar-22 31-Mar-22 31-Mar-22
Euro US Dollar CAD Dollar Euro US Dollar CAD Dollar
£000 £000 £000 £000 £000 £000
Royalty investment 9,779 27,330 11,304 14,118 16,061 11,380
Equity investments 6,760 - 1,377 3,814 - 461
Loans receivable - - - - - -
Cash and cash equivalents - 81 54 189 247 81
Trade and other receivables 2,231 - - 2,141 - -
Royalty participation liability - - - - - -
Transaction costs payable - (1,629) - - (1,300) -
18,770 25,782 12,735 20,262 15,008 11,922
If Sterling strengthens by 10% against the Euro, the net Euro-denominated
assets would reduce by £844,000 (2022: £965,000). Conversely, if Sterling
weakens by 5% the assets would increase by £932,000 (2022: £1,066,000).
If Sterling strengthens by 5% against the US Dollar, the net US
Dollar-denominated assets would reduce by £1,228,000 (2022: £715,000).
Conversely, if Sterling weakens by 5% the assets would increase by £1,357,000
(2022: £790,000).
If Sterling strengthens by 5% against the Canadian Dollar, the net Canadian
Dollar-denominated assets would reduce by £606,000 (2022: £568,000).
Conversely, if Sterling weakens by 5% the assets would increase by £670,000
(2022: £627,000).
Interest rate risk
Interest rate risk is the risk that the fair value of future cash flows of a
financial asset will fluctuate because of changes in market interest rates.
The Group's main interest rate risks arise in relation to its royalty
investments, which are carried at fair value through profit or loss, and its
borrowings, which are subject to an interest charge of one-month UK SONIA
+5.00%. The Group's royalty investments have a fair value at the reporting
date of £191,333,000 (31 March 2022: £160,479,000). A sensitivity analysis
in respect of these assets is presented in note 23.
The Group's borrowings at the reporting date are £53,930,000, see Note 15 (31
March 2022: £47,740,000). A movement in the rate of SONIA of 100bps impacts
loan interest payable by £539,000 (31 March 2022: £477,000).
Other price risk
Other price risk is the risk that the fair value of future cash flows of a
financial asset will fluctuate because of changes in market prices (other than
those arising from interest rate risk or foreign exchange risk).
The fair value of the Group's royalty investments fluctuates due to changes in
the expected annual adjustment factors applied to the royalties payable by
each of the investee companies, which are based upon the revenue growth of the
investee company.
A sensitivity analysis in respect of the annual adjustment factors applied to
the royalty investments is presented in note 23.
Credit risk
Credit risk is the risk that one party to a financial instrument will cause a
financial loss for the other party by failing to discharge an obligation.
The Group's maximum exposure to credit risk is as follows:
31-Mar-23 31-Mar-22
£000 £000
Royalty investments 191,333 160,479
Loan investments 4,652 4,172
Cash and cash equivalents 8,939 5,707
Trade and other receivables 2,290 2,194
207,214 172,552
Royalty investments
The royalty investments relate to the Group's 15 royalty financing agreements.
At the reporting date, there was £4,423,000 of royalty cash payments
outstanding (31 March 2022: £2,439,000) from three royalty partners (31 March
2022: 2). Of this, £nil (31 March 2022: £nil) was received in the month post
year-end. Payment plans have been agreed to recover the £4,423,000 from all
three royalty partners over the next five years.
The Group monitors the credit worthiness of the investee companies on an
ongoing basis and receives regular financial reports from each investee
company. These reports are reviewed by the Board on a semi-annual basis. The
credit risk relating to these investments is taken into account in calculating
the fair value of the instruments.
The Group also has security in respect of the royalty investments which can be
called upon if the counterparty is in default under the terms of the
agreement.
Loan investments
The Group's loan investments are held at amortised cost. All loans have been
reviewed by the directors. The Board considered the credit risk, both at issue
and at the year-end, and has determined that there have been no significant
movements. Consequently, any loss allowance is limited to 12 months' expected
losses and such allowances are considered to be immaterial.
Cash and cash equivalents
The credit quality of the Group's cash and cash equivalents can be assessed by
reference to external credit ratings as follows:
31-Mar-23 31-Mar-22
£000 £000
Moody's credit rating:
A1 6,681 3,657
Baa1 2,220 2,018
Baa2 38 -
B+ - 32
8,939 5,707
The Group considers that the credit risk relating to cash and cash equivalents
is acceptable.
Liquidity risk
Liquidity risk is the risk that the Group will encounter in realising assets
or otherwise raising funds to meet financial commitments.
The Group maintains sufficient cash to pay accounts payable and accrued
expenses as they fall due. The Group's overall liquidity risks are monitored
on a quarterly basis by the Board.
At the year end the Group had access to an undrawn borrowing facility of
£42,000,000 (2022: £6,800,000 (see note 15).
The table below analyses the Group's royalty investments and financial
liabilities into relevant maturity groupings based on their undiscounted
contractual maturities.
Less than one year 1 - 5 years Over five years Total
As at 31 March 2023 £000 £000 £000 £000
Royalty finance investments 25,967 149,279 747,951 923,197
Royalty finance liabilities 121 571 3,540 4,232
Trade and other payables (433) (882) (431) (1,746)
Borrowings (441) (53,930) - (54,371)
25,214 95,038 751,060 871,312
Less than one year 1 - 5 years Over five years Total
As at 31 March 2022 £000 £000 £000 £000
Royalty finance investments 20,550 93,694 656,584 770,828
Royalty finance liabilities 116 615 3,457 4,188
Trade and other payables (443) (1,011) (918) (2,372)
Borrowings (3,864) (58,455) - (62,319)
16,359 34,843 659,123 710,325
Capital management
The Board manages the Company's capital with the objective of being able to
continue as a going concern while maximising the return to Shareholders
through the capital appreciation of its investments. The capital structure of
the Company consists of equity as disclosed in the Consolidated Statement of
Financial Position
25. Events after the financial reporting date
Dividends
On 12 April 2023 the Company paid a quarterly dividend of 0.70 pence per
share.
Exits
On 24 May 2023, Duke announced that it had exited its investments in Instor
Solutions, Inc ("Instor"). The total cash return was £8.7 million.
New royalty investments
On 23 June 2023, the Group announced a £1,800,000 follow-on investment into
Tristone.
On 30 June 2023, the Group announced a £1,900,000 follow-on investment into
New Path Fire & Security.
Directors Nigel Birrell (Chairman)
Neil Johnson
Charles Cannon Brookes
Matthew Wrigley
Maree Wilms
Secretary and administrator IQ EQ Fund Services Trident Trust Company (Guernsey) Limited
(Guernsey) Limited) (until 31 May 2023)
(from 1 June 2023)
Ground Floor, Cambridge House Trafalgar Court
Le Truchot 4th Floor, West Wing
St Peter Port St Peter Port
Guernsey GY1 1WD Guernsey, GY1 2JA
Registered in Guernsey, number 54697
Website address www.dukeroyalty.com
Registered office Ground Floor, Cambridge House
Le Truchot, St Peter Port
Guernsey, GY1 1WD
Independent auditor BDO Limited
Place du Pre, Rue de Pre
St Peter Port
Guernsey, GY1 3LL
Co-brokers Cenkos Securities plc Canaccord Genuity Limited
6-8 Tokenhouse Yard 88 Wood Street
London, EC2R 7AS London, EC2V 7QR
Nominated advisor Cenkos Securities plc
6-8 Tokenhouse Yard
London, EC2R 7AS
Support service providers Arlington Group Asset Abingdon Capital Corporation
Management Ltd
47/48 Piccadilly 4 King Street W., Suite 401
London, W1J 0DT Toronto, Ontario
Canada, M5H 1B6
Registrar and CREST agent Computershare Investor Services
(Guernsey) Limited
3(rd) Floor, Natwest House
Le Truchot, St Peter Port
Guernsey, GY1 2JP
Advocates to the Company as to Appleby (Guernsey) LLP
Guernsey law Hirzel Court
Hirzel Street
St Peter Port
Guernsey, GY1 3BN
Investment Committee Jim Webster (Chairman) Andrew Carragher
Neil Johnson Justin Cochrane
Charles Cannon Brookes John Romeo
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