Duke Royalty AIM:DUKE the AIM-listed provider of alternative capital, has invested a further GBP3.2m into existing royalty partner Tristone Healthcare Limited to fund its latest acquisition.
The top-up investment follows the refinancing and up-sizing of a GBP100m credit facility with Canadian investment manager and insurer, Fairfax Financial Holdings TSX:FFH.
Tristone is a Manchester-based residential and in-home social and therapeutic care company set up in 2015 that provides support to individuals with severe mental, physical or learning disabilities and care leavers, aged between 16 and 19, who are transitioning out of social care and into independent living.
Refinancing support
In December 2021 Tristone received GBP20m of funding from Duke Royalty to support its long-term growth ambitions. The capital was used to refinance Tristone’s existing facilities, as well as supporting current investments and future acquisitions.
The new GBP3.2m investment has been put towards Tristone’s acquisition of K Bond Healthcare, trading as Next Steps, a residential and nursing care provider operating in Greater Manchester founded in 2015. With the top-up Duke Royalty said in a statement this morning (13th December) that the financing increases Duke’s total investment into Tristone to GBP17.6m. Duke Royalty confirmed that the investment terms are the same as Duke’s previous follow-on investment into Tristone, including a starting yield of 13.5% and a +/- 6% annual revenue adjustment factor in respect of royalty payments due.
Next Steps would be the third acquisition by Tristone that Duke has supported, as the healthcare provider tries to grow its critical mass by acquisition.
As previously reported, Duke Royalty usually offers royalty issuers between GBP5m and GBP20m with a fast turn-around (compared to banks, stock markets or private equity firms) of around seven to eight weeks. The royalty is repaid over 25 to 40 years, a bit like a mortgage and typical yields that Duke expected are in the 12% to 14% range for the capital it provided. Royalties rates are reviewed annually dependent on the issuer’s sales performance. The issuer has the option to buy back the royalty, with a 20% redemption premium.
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Neil Johnson, chief executive of Duke Royalty said in a statement to the market this morning: “This acquisition represents an important strategic step in expanding Tristone’s geographical presence in the North West and there is scope to open further facilities, replicating Next Steps’ existing and highly successful model.”
Cheaper expanded credit
The new debt facility with Fairfax sees Duke increase the overall package from GBP55m to GBP100, giving the royalty company: “a significant amount of additional liquidity and […] push out the company’s requirement for additional equity capital,” Duke said in a statement.
The new lien of credit will have a five-year tenor, expiring in January 2028, with a bullet repayment on expiry and no amortisation payments during the five-year term and will be available for draw-down mid-to-late January 2023. The new facility will be available when the historic facility expires.
Interest rate for the new facility is equal to Sterling Overnight Index Average (SONIA) plus 5% per annum, which represents an improvement of 225bps on Duke’s existing rate of SONIA plus 7.25%. This will have an immediate and material impact on the free cash flow of Duke. As security Duke issued 41.6 million warrants to Fairfax with a five-year maturity and strike price of 45p.
The company opened trading today (1st November) at 36.7p and had fallen to 35.9p by mid-morning trading. The company has offered a one-year return of -15.6%, a year-to-date return of -18.6% and its shares have ranged between 27.25p and 46p over a 52-week period. The company is capitalised at GBP153.2m.
Attractive dividend yield
Shore Capital, a broker has Duke Royalty under coverage. The broker has Duke Royalty as a ‘Buy’ with a target price of 49p. Gary Greenwood, a financial analyst for Shore Capital said: “This [the Tristone deal] provides further evidence that Duke’s product offering, which provides long-term funding to royalty partners without material equity dilution, remains attractive to private businesses owners who are looking to fund acquisitions, grow organically, restructure their balance sheet, or enact a management buy-out.”
Greenwood continued: “Duke’s shares are down 14% YTD. At yesterday’s closing price of 37p, they offer an attractive dividend yield at close to 8% based on current annualised payment of 2.8p/share. Our fair value current, which is based on a dividend discount model, sits at 49p – a 32% upside – implying a yield of just 6%”
Deshe Analytics consider Duke a ‘Hold’ with the company’s financials of Q3 reflecting “decent results”. Deshe concluded: “This typically translates into the stock performing on par with market performance for the upcoming quarter. Overall, Duke Royalty Limited’s value and growth factors are trending positively, and we, therefore, give Duke Royalty Limited an overall grade of 75 and a HOLD recommendation.”
As previously reported Duke’s model is attractive to companies seeking finance in an inflationary cycle – which is where the economy finds itself now. Royalty financing is a significant market in North America, but in the UK it’s a newer concept and Duke is the only listed royalty finance company. It’s aversion to traditional ‘royalty’ targets, like mining and oil is also interesting and seems to be focussed on core service requirements in the UK, like healthcare, technology and business services, allowing it to capture real economic opportunities on the main street.
As E.B.Tucker said in a conversation earlier this year with The Armchair Trader regarding gold royalties: “The royalty business is not easy – it’s a relationship business. Royalties are hard-to-find and there are no matchmaking apps or websites that advertise them. But if you are looking to make money [-] they are the kings of finding paydirt.”
