Taking Duke Capital to the next level

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 shares, which support DUKE’s high, covered and growing dividend yield (2025E 10.0%, 2026E 10.7%, 2027E 11.4%); iii) early exit fees; and iv) equity stakes. Here, we update investors on how management will take DUKE to the next level, noting i) a £20.2m+ equity issue to fund short-term growth, and ii) the progress made towards a third-party capital model, negating the need for further raises.

• Equity raise: Instead of the £40m raise we had been forecasting in FY’26, DUKE seeks to raise £20.2m+ now, and indicates greater confidence that further issues will not be necessary. The risk of dilution is thus lower than it was before this announcement. The current raise is to fund expected client buy-and-build deals.
• Third-party capital model: Using third-party capital potentially brings revenue, gearing, risk, liquidity, capital and income benefits. The constraint, to date, has been that DUKE’s innovative product was little known. As a track record has been built, confidence has grown, and DUKE has made significant progress.
• Valuation: The FY’25E dividend yield is 10.0%. On the assumptions outlined in the initiation report, our valuation approaches indicate GGM 44.2p, discounted cashflow 72.3p, and dividend discount 43.1p, with an average of 53.2p against the current share price of 28.1p.
• 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 thus 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.