REG - Duke Royalty Limited - Interim Results
9 December 2020
Duke Royalty Limited
("Duke Royalty", "Duke" or the "Company")
Interim Results for the six months ended 30 September 2020
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 interim results for the six-months ended 30 September 2020.
Highlights
· Cash revenue of £4.4m for the period under review (2019: £5.0m)
· Net cash inflow from operations of £3.6m (2019: £3.9m)
· Reduced cash operating costs to £890,000 (2019: £1.1m)
· Scrip dividends of 1.0p/share paid to shareholders
· Reinstatement of quarterly cash dividend, with 0.50p announced for Q3 FY21
· First successful exit of investment in royalty partner XtremePush
· Deployed over £5.7m of capital into existing royalty partners
· Five forbearance agreements were entered into to support partners through Covid-19 pandemic, with four now completed and Duke retaining future value in those royalty partners
· Net debt of £14.4 million providing c. £20m of available capital for new deployments
· Business development activities actively resumed, with a significant and growing pipeline of opportunities under evaluation
Neil Johnson, CEO of Duke Royalty, said:
"This set of results demonstrates the resilience of our business model through one of the harshest of economic cycles.
"Duke saw cash revenue of £4.4 million and net cash inflows from operations totalling £3.6 million, just 8% below the comparative period in 2019, despite the structuring of five forbearance agreements to support our royalty partners through the pandemic. During the period, we also deployed £5.7 million of capital into existing royalty partners and achieved the Company's first successful exit of an investment in a royalty partner, XtremePush at an IRR of 22%.
"The Company's balance sheet remains strong following the decision to temporarily revert to the payment of a scrip dividend. Cash grew to £5.6 million, leaving a net debt position to £14.4 million, while providing the company with c. £20 million of spare liquidity for new investments.
"Due to the operational improvements and improved macro environment, Duke has now announced its intention to revert back to the payment of cash dividends, with a 0.5p per share dividend announced for Q3 FY21.
"We are trading in line with market expectations and our portfolio companies continue to return to normalised trading levels. Looking ahead to 2021, we are well positioned to continue our growth. The pandemic has given business owners another reason to look for long term capital, and we have many new opportunities under evaluation. In addition, we look forward to strengthening our portfolio through follow-on investments into existing partners."
For further information, please contact www.dukeroyalty.com, or contact:
Duke Royalty Limited
Neil Johnson / Charlie Cannon Brookes / Hugo Evans
+44 (0) 1481 741 240
Cenkos Securities plc
(Nominated Adviser and Joint Broker)
Stephen Keys / Callum Davidson / Julian Morse / Michael Johnson
+44 (0) 207 397 8900
Canaccord Genuity
(Joint Broker)
Adam James / Georgina McCooke
+44 (0) 207 523 8000
Newgate Communications (PR)
Elisabeth Cowell/ Ian Silvera/ Megan Kovach
+ +44 (0) 20 3757 6880
CHAIRMAN'S REPORT
Dear Shareholder,
I am pleased to report the results for the Group for the six-month period ended 30 September 2020 ("Interim 2021"). I am sure that I do not need to remind investors that Interim 2021 was a period of considerable turbulence across global markets with the emergence of Covid-19 creating significant and unique challenges both for Duke and for each of its underlying royalty partners. During March 2020 as the impact of the spread of Covid-19 became apparent, Duke formulated and implemented its business continuity plan. From an operational standpoint, the continuity plan has proved effective and I am glad to say that Duke's staff have not suffered any positive Covid-19 cases to date.
Importantly, Duke took the approach of working closely with the management teams of each underlying business, in line with its partnership model. In helping these management teams navigate through this volatile period, Duke exited the period under review having effectively demonstrated the supportive and flexible nature of its financing and with monthly cash distributions having resumed from the majority of those it had entered into forbearance agreements with. We are confident that this strengthened reputation will position us to become the capital partner of choice for numerous compelling, high growth businesses going forward, which do not wish to become encumbered by debt, and this belief is underpinned by our strong pipeline.
This period also highlighted the general resilience of our business model to shareholders, whose patience during the period we have truly appreciated. The Company's immediate response to the Covid-19 pandemic was to cut all non-essential operating costs and to place a moratorium on new deployments. However, after paying a scrip dividend for the two quarters which comprised our interim period in order to ensure that we retained sufficient available liquidity to re-invest in the portfolio where required, we are pleased to have resumed payment of our cash dividends for the third quarter of our financial year.
Operational Review
The Company released a detailed portfolio update to the market on 12 November 2020 which outlined the considerable efforts made by Duke and its investment team during Interim 2021. By design, Duke's long term capital is structured to be aligned with its royalty partners, their owners and managers through the ups and downs of economic cycles. Seven out of Duke's 12 Royalty Partners maintained their monthly cash payments to Duke throughout the pandemic while four out of the five royalty partners which had entered into forbearance agreements with Duke at the start of the pandemic have now come out of forbearance.
Investors should take comfort that due to the secured nature of our agreements, and preferred status as regards equity, the Company was able to take action to preserve shareholder value for the long term in the form of equitisation, capitalisation, or deferral of the short term cash payments which were forgone. Duke's goal was to support good business owners who, through no fault of their own, faced an unprecedented shock to their business. Acting to preserve the companies as going concerns instead of trying to enforce Duke's security has meant that, for the most part, the companies have been able to trade out of the pandemic months while Duke Royalty has maintained or increased its potential IRR on each investment as a result of the new material equity stakes that it has received in lieu of the forgone cash payments. Finally, Duke has continued to support those royalty partners who have been able to take advantage of their relative strength to deploy more capital and acquire other companies on an accretive basis.
With cash payments having been resumed from the majority of its Royalty Partners, the Company has increased confidence in the cash revenue outlook for the full year and beyond. Based on this improved outlook, Duke reinstated market guidance with its two co-brokers in November 2020 while at the same time announcing the recommencement of its normal quarterly cash dividend.
In regard to new deployments made during the period Duke completed two follow-on investments into Welltel (Ireland) Limited ("Welltel"), the Dublin based telecoms, IT and network specialist which in aggregate totalled £5.3 million. The first of these investments was made in June 2020 to provide the capital required for Welltel to acquire Globalnet Solutions Limited, trading as Novi which was then rapidly followed by Welltel's acquisition of Intellicom Ireland Limited in August 2020. In September 2020, it was pleasing to be able to announce the successful exit of Duke's £2.0 million investment in royalty partner Xtremepush Limited ("Xtremepush"), the Dublin-based B2B technology platform. This transaction represented Duke's first exit and whilst Xtremepush represented one of the smaller investments within the Duke portfolio, the deal nonetheless returned an attractive IRR of 22% with Duke retaining its warrant over 3% of Xtremepush's share capital.
Financial Review
I am pleased to report that the Company's cash revenue, being cash distributions from royalty partners and cash gains from the sale of equity investments, was £4.4 million during the period under review. Furthermore, despite agreeing to enter into five forbearance agreements to support its royalty partners which resulted in a short-term reduction in cash receipts, net cash inflow from operations totalled £3.6 million, only an 8% decrease against the £3.9 million generated in Interim 2020. It is pleasing to report that despite the very challenging macro conditions derived as a result of Covid-19, Duke's cash generation held up well with the majority of the Company's royalty partners making their monthly payments on time and Duke continuing to adopt a disciplined approach to its own central operating costs.
Of the five royalty partners which entered into the forbearance agreements during the period, four have now come out of forbearance. As previously reported, in three of these cases Duke elected to equitise its foregone cash receipts and now has long term exposure to the growth of these royalty partners through equity positions of c. 30%. As such this reduction in cash was not lost and we are optimistic that Duke will be able to report enhanced returns from these investments over time as a result of its actions.
Total income, which includes non-cash fair value movements on the Company's investment portfolio, grew to £7.1 million, a 20% increase over Interim 2020. This reflects the re-rating of the portfolio following the significant write downs that affected the fair value of the investments in FY20 as a result of the pandemic. In the event that the macro trading environment normalises and cash distributions return to levels more akin to pre-Covid-19 then we should expect this re-rating effect to continue. Total comprehensive income after tax grew to £4.1 million, up 26% from 2019.
The Company's balance sheet, and specifically cash levels, remain strong following the decision to temporarily revert to the payment of a scrip dividend. Cash grew to £5.6 million, leaving a net debt position of £14.4 million, while providing the company with c. £20 million of available liquidity for new deployments with several new and follow-on investment opportunities currently at a late stage of due diligence.
Dividend
The Company took the decision to suspend its quarterly cash dividend in June in order to conserve cash as it navigated its way through the pandemic. However, Duke continued to pay a quarterly scrip dividend of 0.5p per share for the two quarters in the period. Due to the operational improvements and improved macro environment, Duke has now announced its intention to revert to the payment of cash dividends, with a 0.5p per share dividend announced for Q3 FY21.
Outlook
The Duke team has worked hard to manage the Company and its royalty partners through the difficulties presented by the pandemic over the past six months and management has been pleased to showcase the flexibility shown to its royalty partners demonstrating that Duke is a supportive, long-term capital partner to SMEs.
This has supported the creation of a robust pipeline of new opportunities, and we are currently evaluating 14 active opportunities equating to potential investments of more than £65 million. Our strengthened cash position on the back of the initiatives we put in place at the start of the pandemic, and our recent exit, mean that we are in a strong position to execute on those that we feel are best placed to benefit our shareholders in the coming months and to grow our existing portfolio of long standing and profitable SME businesses. Our due diligence and origination criteria remain as strong as ever.
While the economic outlook is still unsettled, we are trading in line with market expectations and the recent enquiries we have received lead us to believe that business owners place more value on long-term capital partners like Duke Royalty during times of heightened short term uncertainty. Importantly, Duke has a market leading presence in the UK and Europe, enabling it to capitalise on this.
Our business model continues to present investors with the same benefits that it has always demonstrated since we listed in 2017, namely, annuity-like revenue streams, high operational gearing, a compounding opportunity through participation in growth by annual adjustments, yield compression as the portfolio grows, and a commitment to grow quarterly dividends once again now that our business has stabilised. While Brexit poses a certain level of uncertainty to every business in the country to some extent, the overall resiliency of our business model, and the attractive qualities it presents shareholders, have not changed, and I believe that they will provide us with a strong backbone for growth in the future.
As always, I am appreciative of the ongoing support of our shareholders and am pleased to report the Chairman's statement for Interim 2021. The Group is well placed to continue to grow and I look forward to being able to report on the Group's ongoing progress and development in future periods.
Nigel Birrell
Chairman
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDED 30 SEPTEMBER 2020
Period to
Year to
Period to
30-Sep-20
31-Mar-19
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Cash flows from operating activities
Receipts from royalty investments
3,654
8,977
4,397
Receipts of interest from loan investments
381
1,268
625
Receipts from transaction costs reimbursed
6
90
6
Proceeds from disposal of equity instruments
345
-
-
Payments for royalty participation fees
(52)
(168)
(78)
Operating expenses paid
(893)
(2,811)
(1,084)
Tax received / (paid)
135
(573)
Net cash inflow from operating activities
3,576
6,783
3,866
Cash flows from investing activities
Royalty investments received / (advanced)
(4,426)
(17,751)
(250)
Loan investments received / (advanced)
968
(2,661)
(1,400)
Equity investments advanced
(350)
-
-
Payment for acquisition of subsidiaries, net of cash acquired
-
(321)
(321)
Investment costs paid
(61)
(548)
(404)
Net cash outflow from investing activities
(3,869)
(21,281)
(2,375)
Cash flows from financing activities
Proceeds from share issue
-
17,454
-
Share issue costs
-
(1,048)
-
Dividends paid
(1,778)
(6,013)
(2,760)
Proceeds from loans
4,000
16,250
-
Loan repaid
-
(11,650)
-
Interest paid
(663)
(1,425)
(662)
Other finance costs paid
(157)
(534)
-
Net cash inflow from financing activities
1,402
13,034
(3,422)
Net change in cash and cash equivalents
1,109
(1,464)
(1,931)
Cash and cash equivalents at beginning of Period/year
4,481
5,894
5,894
Effect of foreign exchange on cash
14
51
35
Cash and cash equivalents at the end of period/year
5,604
4,481
3,998
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE PERIOD ENDED 30 SEPTEMBER 2020
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
Note
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Income
Royalty investment net income
5
7,509
(2,994)
5,056
Loan investment net income
6
339
1,235
672
Impairment loss on loan investments
6
-
(2,947)
-
Equity investment net income
7
(769)
(670)
34
Other operating income
6
90
6
Net foreign currency gains
15
246
135
Total income
7,100
(5,040)
5,903
Investment Expenses
Transaction costs
11
(448)
(208)
Due diligence costs
40
(95)
(56)
51
(543)
(264)
Operating Expenses
Administration and personnel
(953)
(1,725)
(643)
Legal and professional
(178)
(584)
(315)
Other operating expenses
(41)
(471)
(140)
Share-based payments
(303)
(409)
(158)
(1,475)
(3,189)
(1,256)
Operating profit / (loss)
5,676
(8,772)
4,383
Finance costs
(815)
(1,607)
(694)
Profit / (loss) for the period before tax
4,861
(10,379)
3,689
Taxation expense / (credit)
3
(734)
1,481
(406)
Total comprehensive income / (loss) for the period
4,127
(8,898)
3,283
Basic earnings / (loss) per share (pence)
1.73
(4.16)
1.66
Diluted earnings / (loss) per share (pence)
1.73
(4.16)
1.65
All income is attributable to the holders of the Ordinary Shares of the Company.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
FOR THE PERIOD ENDED 30 SEPTEMBER 2020
Note
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Non-current assets
Goodwill
13
203
203
203
Royalty finance investments
5
53,299
59,435
61,952
Loan investments
6
3,357
4,418
9,052
Equity investments
7
172
507
1,211
Deferred tax asset
9
204
675
-
57,235
65,238
72,418
Current assets
Royalty finance investments
5
30,186
16,124
9,106
Loan investments
6
5,192
5,099
2,065
Trade and other receivables
10
67
142
260
Cash and cash equivalents
5,604
4,481
3,998
Current tax asset
169
567
-
41,218
26,413
15,429
Total Assets
98,453
91,651
87,847
Current liabilities
Royalty debt liabilities
8
131
133
212
Trade and other payables
11
484
318
250
Borrowings
12
117
172
257
Current tax liability
-
-
538
732
623
1,257
Non-current liabilities
Royalty debt liabilities
8
1,063
1,040
1,172
Trade and other payables
11
400
431
480
Borrowings
12
19,566
15,517
11,470
Deferred tax liability
9
-
680
21,029
16,988
13,802
Net Assets
76,692
74,040
72,788
Equity
Shares issued
14
119,663
118,479
102,044
Share based payment reserve
15
1,045
742
491
Warrant reserve
15
265
265
265
Retained losses
16
(44,281)
(45,446)
(30,012)
Total Equity
76,692
74,040
72,788
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE PERIOD ENDED 30 SEPTEMBER 2020
Share-based
Shares
payment
Warrant
Retained
Total
Note
issued
reserve
reserve
losses
equity
£000
£000
£000
£000
£000
At 1 April 2019
102,044
333
265
(30,534)
72,108
Total comprehensive income for the period
-
-
-
3,283
3,283
Transactions with owners
Share based payments
-
158
-
-
158
Dividends
-
-
-
(2,761)
(2,761)
Total transactions with owners
-
158
-
(2,761)
(2,603)
At 30 September 2019
102,044
491
265
(30,012)
72,788
Total comprehensive income for the period
-
-
-
(12,181)
(12,181)
Transactions with owners
Shares issued for cash
17,454
-
-
-
17,454
Share issuance costs
(1,059)
-
-
-
(1,059)
Share based payments
40
251
-
-
291
Dividends
-
-
-
(3,253)
(3,253)
Total transactions with owners
16,435
251
-
(3,253)
13,433
At 31 March 2020
118,479
742
265
(45,446)
74,040
Share-based
Shares
payment
Warrant
Retained
Total
Note
issued
reserve
reserve
losses
equity
£000
£000
£000
£000
£000
At 1 April 2020
118,479
742
265
(45,446)
74,040
Total comprehensive income for the period
-
-
-
4,127
4,127
Transactions with owners
Shares issued as dividends
1,184
-
-
-
1,184
Share based payments
-
303
-
-
303
Dividends
-
-
-
(2,962)
(2,962)
Total transactions with owners
1,184
303
-
(2,962)
(1,475)
At 30 September 2020
119,663
1,045
265
(44,281)
76,692
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD ENDED 30 SEPTEMBER 2020
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 25.
Throughout the period, 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, Duke Royalty Switzerland GmbH 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
1.1 Basis of preparation
The interim Condensed Consolidated Financial Statements of the Group have been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting", as adopted by the European Union, and using the going concern basis of preparation. These interim financial statements do not contain all the information and disclosures as presented in the annual financial statements, and should be read in conjunction with the Consolidated Financial Statements of the Group for the year ended 31 March 2020, which have been prepared in accordance with International Financial Reporting Standards ("IFRS"), to the extent that they have been adopted by the European Union, and applicable Guernsey law.
The accounting policies adopted in the preparation of the interim Condensed Consolidated Financial Statements are consistent with those followed in the preparation of the Consolidated Financial Statements of the Group for the year ended 31 March 2020.
The Financial Statements have been prepared on a 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
1.2 New and amended standards adopted by the Group
There were no new standards adopted by the Group during the reporting period.
1.3 Going concern
In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council. After making enquiries and bearing in mind the nature of the Company's business and assets, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future.
The Covid-19 pandemic has caused extensive disruptions to businesses and economic activities globally including impacting the royalty partners. The investment team have been, and are in constant contact with the royalty partners and in certain circumstances, forbearance agreements were structured to cover the six-month period ending September 2020. Rather than surrendering this revenue, these agreements mean Duke's forgone cash distributions for the first six months of the pandemic have been either accrued, capitalised or equitised.
The cash flow needs of the Group have been assessed taking account of the reduced cash flows from royalty payments, the need for further funding for any of the existing royalty partners and the ongoing working capital needs of the business against the current cash and liquidity of the Group.
Furthermore, there is adequate headroom in terms of the uncalled loan facility in place should it be required.
3. Income tax
The Company has been granted exemption from Guernsey taxation. The Company's subsidiary in the UK is subject to taxation in accordance with relevant tax legislation.
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Current tax
Income tax expense / (credit)
263
(241)
291
Deferred tax
Decrease / (Increase) in deferred tax assets
483
(430)
93
(Decrease) / increase in deferred tax liabilities
(12)
(876)
22
Change in rate of deferred tax from 17% to 19%
-
66
-
471
(1,240)
115
Income tax expense / (credit)
734
(1,481)
406
Factors affecting income tax expense / (credit) for the year
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Profit / (loss) on ordinary activities before tax
4,861
(10,379)
3,689
Tax using the Groups effective tax rate of 15.10% (2020: 14.67%, period to 30 September 2019: 11.29%)
734
(1,547)
417
Differential in tax rate
-
66
(11)
Income tax expense / (credit)
734
(1,481)
406
4. Earnings / (deficit) per share
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Total comprehensive income / (loss) (£000)
4,127
(8,898)
3,283
Weighted average number of Ordinary Shares in issue, excluding treasury shares (000s)
238.797
213,792
197,182
Basic earnings / (deficit) per share (pence)
1.73
(4.16)
1.66
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Total comprehensive income / (loss) (£000)
4,127
(8,898)
3,283
Weighted average number of Ordinary Shares, diluted for warrants in issue (000s)
238.797
213,792
199,182
Diluted earnings / (deficit) per share (pence)
1.73
(4.16)
1.65
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. 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.
Adjusted earnings per share
Adjusted earnings represents 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.
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.
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Total comprehensive income / (loss) for the period
4,127
(8,898)
3,283
Unrealised fair value movements
(2,658)
12,641
(693)
Impairment loss on loan investments
-
2,947
-
Share-based payments
303
409
158
Transactions costs / (receipts) net of costs reimbursed
(51)
543
208
Royalty participation fees
-
-
-
Tax effect of the adjustments above at Group effective rate
353
(2,426)
37
Adjusted earnings
2,074
5,216
2,993
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Adjusted earnings (£000)
2,074
5,216
2,993
Weighted average number of Ordinary Shares, excluding treasury shares (000s)
238,797
213,792
197,182
Adjusted earnings per share (pence)
0.87
2.44
1.52
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Adjusted earnings (£000)
2,074
5,216
2,993
Weighted average number of Ordinary Shares, diluted for warrants in issue (000s)
238,797
213,792
199,182
Diluted adjusted earnings per share (pence)
0.87
2.44
1.50
5. Royalty finance investments
Royalty finance investments are financial assets held at fair value through profit and loss that relate to the provision of royalty capital to a diversified portfolio of companies.
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Brought forward
75,559
70,054
70,054
Additions
5,326
20,983
250
Refinanced assets
(900)
(3,233)
-
Gain / (loss) on financial assets at FVTPL
3,500
(12,245)
754
83,485
75,559
71,058
Royalty finance investments are comprised of:
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Non-Current
53,299
59,435
61,952
Current
30,186
16,124
9,106
83,485
75,559
71,058
Royalty investment net income on the face of the consolidated statement of comprehensive income comprises:
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Royalty interest
4,082
8,976
4,397
Gain / (loss) on royalty assets at FVTPL
3,500
(12,245)
754
(Loss) / gain on royalty liabilities at FVTPL
(73)
275
(95)
7,509
(2,994)
5,056
All financial assets held at fair value through profit and loss are mandatorily measured as such.
The Group's royalty investment assets comprise royalty financing agreements with 11 (30 September 2019: 12, 31 March 2020: 12) 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 investees' assets. The investees are provided with buyback options, exercisable at certain stages of the agreements.
6. Loan investments
Loan investments are financial assets held at amortised cost.
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Brought forward
9,517
9,626
9,626
Additions
132
7,203
1,400
Refinanced loans
(1,100)
(4,542)
-
ECL allowance
-
(2,947)
-
Net foreign currency movement
-
177
91
8,549
9,517
11,117
The Group's loan investments comprise secured loans advanced to six entities (30 September 2019 - five, 31 March 2020: six) in connection with the Group's royalty investments.
The loans comprise fixed rate loans of £6,192,000 which bear interest at rates of between 5% and 16% and one variable rate loan of £2,357,000 which bears interest at 14.5% over LIBOR.
The loans mature as follows:
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
In less than one year
5,192
5,099
2,065
In one to two years
-
-
-
In two to five years
3,357
4,418
9,052
8,549
9,517
11,117
Loan investment net income on the face of the consolidated statement of comprehensive income comprises:
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Loan investment net income
339
1,235
672
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 30 September 2020
£000
£000
£000
Stage 1
5,269
-
5,269
Stage 2
-
-
-
Stage 3
3,280
-
3,280
8,549
-
8,549
Gross carrying amount
Allowance for ECLs
Net
Carrying amount
As at 31 March 2020
£000
£000
£000
Stage 1
6,369
-
6,369
Stage 2
-
-
-
Stage 3
6,095
(2,947)
3,148
12,464
(2,947)
9,517
Gross carrying amount
Allowance for ECLs
Net
Carrying amount
As at 30 September 2019
£000
£000
£000
Stage 1
11,117
-
11,117
Stage 2
-
-
-
Stage 3
-
-
-
11,117
-
11,117
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.
At 31 March 2020, the Group determined the risk profile of one loan investment had materially increased and as such, there was objective evidence of impairment. The investment was moved to Stage 3 and a lifetime ECL of £2,947,000 was recognised in the income statement. The investment was still deemed to be impaired at the period ended 30 September 2020 and was still classified as Stage 3.
The credit risk profile of the remaining investments has not increased materially and they remain Stage 1 assets. No ECLs have been charged on these assets as they are not deemed material.
The following table analyses Group's provision for ECL's by stage for the period ended 30 September 2020:
Stage 1
Stage 2
Stage 3
Total
£000
£000
£000
£000
At 1 April 2019 and 30 September 2019
-
-
-
-
Impairment charged in period
-
-
2,947
2,947
Carrying value at 31 March 2020
-
-
2,947
2,947
Movement in period
-
-
-
-
Carrying value at 30 September 2020
-
-
2,947
2,947
7. Equity investments
Equity investments are financial assets held at fair value through profit and loss.
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Brought forward
507
1,177
1,177
Additions
779
-
-
Disposals
(345)
-
-
(Loss) / gain on equity assets at FVTPL
(769)
(670)
34
172
507
1,211
The Group's equity investments comprise unlisted shares and warrants in six of its royalty investment companies (30 September 2019: four, 31 March 2020: six).
The Group also still holds two (30 September 2019: two, 31 March 2020: 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 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:
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
(Loss) / gain on equity investments at FVTPL
(778)
(670)
34
Realised gain on sale of equity investments
9
-
-
(769)
(670)
34
8. Royalty debt liabilities
Royalty debt liabilities are financial liabilities held at fair value through profit and loss.
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Brought forward
1,173
1,366
1,366
Additions
-
250
-
Payments made
(52)
(168)
(78)
Loss on financial assets at FVTPL
73
(275)
95
1,194
1,173
1,384
Royalty debt liabilities are comprised of:
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Current
131
133
212
Non-current
1,063
1,040
1,172
1,194
1,173
1,384
9. Deferred tax
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Brought forward
675
(565)
(565)
(Charged) / credited to profit & loss
(471)
1,240
(115)
Deferred tax asset / (liability)
204
675
(680)
The deferred tax asset arises due to a temporary timing differences on the treatment of transaction costs in the UK subsidiary. This deferred tax asset is expected to reverse over a 30 year period. The utilisation of this asset is dependent on sufficient future taxable profits being generated by the UK subsidiary.
10. Trade and other receivables
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Prepayments and accrued income
64
140
260
Other debtors
3
2
-
67
142
260
11. Trade and other payables
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Current
Trade payables
2
-
5
Transaction costs
94
191
63
Accruals and deferred income
388
127
182
484
318
250
Non-current
Transaction costs
480
431
480
884
749
730
12. Borrowings
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Secured loan
Current - accrued interest
117
172
257
Non-current
19,566
15,517
11,470
19,683
15,689
11,727
The secured loan has an interest rate of 7.25% over LIBOR per annum. The principal amount is repayable on 7 October 2024. The loan is secured by means of a fixed and floating charge over the assets of the Group.
13. Goodwill
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Goodwill arising on business combination
203
203
203
14. Share capital
External Shares
No.
Treasury Shares
No.
Total shares
No.
£000
Allotted, called up and fully paid
At 1 April 2019
197,182
2,690
199,872
102,044
Shares issued for cash during the period
-
-
-
-
Share issuance costs
-
-
-
-
Shares issued to Employee Benefit Trust during the period
-
-
-
-
At 30 September 2019
197,182
2,690
199,872
102,044
Shares issued for cash during the period
39,668
-
39,668
17,454
Share issuance costs
-
-
-
(1,059)
Shares issued to directors and key advisers as remuneration
87
-
87
40
At 31 March 2020
236,937
2,690
239,627
118,479
Shares issued for cash during the period
-
-
-
-
Share issuance costs
-
-
-
-
Scrip dividend paid
4,479
-
4,479
1,184
Shares issued to Employee Benefit Trust during the period
-
2,525
2,525
-
At 31 March 2020
241,416
5,215
246,631
119,663
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.
15. Equity-settled share-based payments
The following table shows the movements in the warrant reserve during the year:
Warrants
No. (000)
£000
At 1 April 2019 and 1 April 2020
4,375
4,265
Issued during the period
-
-
At 30 September 2019, 31 March 2020, and 30 September 2020
4,375
265
No warrants were issued during the period 30 to September 2020.
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 2019
136
197
333
LTIP awards
-
158
158
At 30 September 2019
136
355
491
LTIP awards
-
251
251
At 31 March 2020
136
606
742
LTIP awards
-
303
303
At 30 September 2020
136
909
1,045
Share option scheme
No options were granted during the year
Long Term Incentive Plan
No performance share awards (PSAs) were granted during the period to 30 September 2020.
At 30 September, 5,215,000 (30 September 2019 - 2,690,000, 31 March 2020 - 5,215,000) PSAs were outstanding. The weighted average remaining vesting period of these awards outstanding was 1.44 years (2019 - 2.33 years, 31 March 2020 - 1.99 years).
16. Distributable reserves
Under Guernsey law, the Company can pay dividends provided it satisfies the solvency test prescribed by the Companies (Guernsey) Law, 2008. The solvency test considers whether the Company is able to pay its debts when they fall due, and whether the value of the Company's assets is greater than its liabilities. The Company satisfied the solvency test in respect of the dividends declared in the period.
17. Dividends
The following interim dividends have been recorded in the period:
Dividend per
Dividends
share
payable
Record date
Payment date
pence/share
£000
5 April 2019
17 April 2019
0.70
1,380
28 June 2019
12 July 2019
0.70
1,381
Dividends payable for the period ended 30 September 2019
2,761
Dividend per
Dividends
share
payable
Record date
Payment date
pence/share
£000
27 September 2019
18 October 2019
0.75
1,476
27 December 2019
14 January 2020
0.75
1,777
Dividends paid for the period ended 31 March 2020
3,253
27 March 2020
14 April 2020
0.75
1,777
26 June 2020
10 July 2020
0.50
1,185
Dividends paid for the period ended 30 September 2020
2,962
On 25 September 2020 the Company approved a further quarterly scrip dividend of 0.50 pence per share, totalling £1,207,000, which was paid on 12 October 2020.
18. Related parties
Directors fees
The following fees were payable to the Directors during the period:
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Short term remuneration
366
785
211
Share-based payments
326
341
144
692
1,126
355
Other related party transactions
The following amounts were paid to related parties during the period in respect of support services fees:
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Abingdon Capital Corporation
175
325
150
Arlington Group Asset Management Limited
43
72
50
218
397
200
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 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.
Dividends
The following dividends were paid to related parties:
Period to
Year to
Period to
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Directors 1
126
320
147
Other related parties
10
-
-
136
320
147
1 Includes dividends paid to Abinvest Corporation, a wholly owned subsidiary of Abingdon Capital Corporation, and to Arlington Group Asset Management
19. 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:
30-Sep-20
31-Mar-20
30-Sep-19
(unaudited)
(audited)
(unaudited)
£000
£000
£000
Financial assets
Financial assets at fair value through profit or loss
- Royalty finance investments
83,485
75,559
71,058
- Equity investments
172
507
1,211
83,657
76,066
72,269
Financial liabilities
Financial liabilities at fair value through profit or loss
- Royalty debt liabilities
1,194
1,173
1,384
The following table presents the changes in level 3 items for the periods ended 30 September 2020, 31 March 2020 and 30 September 2019:
Financial
Financial
Assets
Liabilities
Total
£000
£000
£000
At 31 March 2019
71,232
(1,366)
69,866
Additions
250
-
250
Royalty income received
(4,397)
-
(4,397)
RP liability paid
-
77
77
Net change in FV
5,184
(95)
5,089
At 30 September 2019
72,269
(1,384)
70,885
Additions
17,501
(250)
17,251
Royalty income received
(4,580)
-
(4,580)
RP liability paid
-
91
91
Net change in FV
(9,123)
370
(8,753)
At 31 March 2020
76,067
(1,173)
74,894
Additions
6,104
-
6,104
Repayments
(1,245)
-
(1,245)
Royalty income received
3,654
-
3,654
RP liability paid
-
52
52
Net change in FV
(923)
(73)
(996)
At 30 September 2020
83,657
(1,194)
82,463
Valuation techniques used to determine fair values
The fair value of the Group's financial instruments is determined using discounted cash flow analysis and all the 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.
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% and the range of risk-adjusted discount rates is 13.9% to 23.6%.
Equity investments
Sensitivity analysis has not been performed on the Group's equity investments on the basis that they are not material to the Condensed Consolidated Financial Statements
Royalty participation instruments
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% and the range of risk-adjusted discount rates is 16.3% to 17.3%.
20. Events after the financial reporting date
Dividends
On 12 October 2020 the Company paid a quarterly scrip dividend of 0.50 pence per share.
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