FY’24 results: record cashflows

In our April 2024 initiation, we highlighted that DUKE, by optimising the best of equity and debt, aimed to achieve equity-type returns with debt levels of risk. We highlighted four pillars of returns, namely: i) term credit; ii) participating preference share elements, which support DUKE shareholders’ high (2025E: 9.0%), growing (2027E: 14% above FY’24), and 1.7x covered dividend; iii) early exit fees; and iv) equity stakes. The 2024 results saw three of the four show positive returns; consequently, DUKE delivered record recurring cash revenue (+12% to £24.3m) and total cash revenue (+38% to £30.2m), with £18m free cashflow.

• Dividend yield: A key attraction for DUKE is its high yield. Investors will note the 2.8p p/sh. paid in FY’24 was more than covered by free cashflow of 4.3p p/sh, recuring cashflow of 3.5p p/sh and adjusted EPS of 4.85p (up 55%). DUKE expects 12% or more gross yield on the term credit element of its hybrid capital.
• New deals: Our initiation noted that, inter alia, DUKE could grow by gaining new clients or increasing facilities to existing ones. In April and May, we saw announced a new client (Integrum Care £14.5m) and follow-on investments with New Path Fire and Security Limited (£3.5m) and BPVA (Ireland) Limited (£4m).
• Valuation: The FY’25E dividend yield is 8.4%. On the assumptions outlined in the initiation report, our valuation approaches indicate GGM 48.3p, discounted cashflow 70.0p, and dividend discount 43.1p, with an average of 53.8p (an increase from the previous 51.6p, primarily from rolling forward the base year).
• Risks: Counterparty risk is core to any finance provider. Currently, there is adverse sentiment to most speciality finance businesses. We see a short-term dependence on key staff. Many investors are unfamiliar with the product, there are few comparators, and the underlying assets are likely to be illiquid.
• Investment summary: By having a unique proposition, which adds value to clients, and with high barriers to entry, DUKE is able to generate strong returns and so pay a high, consistent dividend. The way the product is structured provides multiple levers for both income and capital growth, as well as limiting the downside risk. DUKE has invested in new staff in FY’24 to optimise the opportunity while showing good discipline in the pacing of new investments.