Traders Cafe with Zak Mir: Dukemount Capital (DKE): The JV In Flexibility

Long Dated Income

What can be a conundrum for the stock market are companies who offer something unique, especially within the context of being a small cap company. Into this category we can add Dukemount Capital (DKE), a “long dated income” play. On the face of it, in the current economic climate, post pandemic, both the idea of income and it being sustainable should be a rather obvious bees to honey concept for investors. Even before the pandemic, with a decade of near zero interest rates, the attractions of a persistent yield play was something which should have been a stand out.

Broadening The Remit

And indeed, for those in the know it was. Dukemount’s focus in the supported living space made sense. However, the advent of COVID 19 has of course, changed the landscape in many ways, and allowed the remit to be broadened. Arguably, the upheavals of 2020 may actually provide the opportunity and the momentum for Dukemount that it could not have achieved otherwise. Indeed, as much as anything else it could be the trigger for the missing piece of the company’s fundamental jigsaw: scalability.

Scalability

Indeed, the S word has been the missing link for Dukemount, and we were reminded that this point has been addressed already in the company’s late March RNS which stated the target of growing to a £100m business. But what is the driver for this transformation? The answer was delivered in the same RNS as Dukemount said it had entered a joint venture in the flexibility power sector. It is set to own 50% of the joint venture vehicle, HSKB Limited.

The Joint Venture

 The joint venture will develop two 11KV gas peaking facilities which together will produce around 10MW of power for a total cost of approx. £6.25million. They key point to note here is that DKE will be providing energy at peak times, where the prices are most competitive and hence the margins are greatest. This is effectively goal hanging the best opportunities in terms of the power sector.

Strangely enough, or perhaps not so strange for anyone who is familiar with the stock market. Shares of Dukemount have weakened since the company confirmed the JV and since £1m was raised to get the ball rolling on the deal. For some reason the bears have decided that they want to see confirmation of what would ideally be a funding of minimal dilution for the deal before they loosen their grip. This is interesting for a couple of reasons.

Funding

The first is that it assumes Dukemount would announce, do the due diligence on, and generally sing the praises of a deal without having a pretty good idea it could get funding for, and in a good way for shareholders.  The second is that it completely misses, not only the feeding frenzy due to shortage of supply currently in the flexible power space, but also the follow-on appetite to fund such projects from blue chip companies. When you add in the explosion in ESG investment demand and Dukemount appears to be in the box seat.

As we come out of the pandemic, infrastructure is everything, with both private and public cash flowing in. In particular, the energy transition process to a cleaner energy future means that flexible power solutions projects of the kind Dukemount is now involved with will provide the pathway to such a goal. This is paramount as the old guard of energy sources is replaced by renewables and flexibility, such as storage – batteries, peakers, interconnectors & demand side response.

Shell Valuation

The second aspect that makes Dukemount a play to follow is the very weakness in the stock currently. Near 0.5p and at a £2.5m market cap the company effectively has a shell valuation with none of the sizzle of HSKB deal included in the valuation. Those who are familiar with the stock will know that the bedwetters / weak hands have been squealing of late, something which is normally a sign that a stock is set to trade higher not lower. They are normally full of the joys of Spring ahead of a downturn.

The scene is therefore set for a “handbrake” turn rebound for Dukemount shares as soon as the company confirms the funding for its power deal. At least for long term holders and followers here, it will be a decent reward for their patience, as well as the validation of the long dated income model.