Q3/24 - Revenues and cash royalty receipts ahead of estimates while adj. EBITDA missed estimates
TSX: DHT-U | CAD 13.85 | Outperform | Price Target CAD 17.00
Sentiment: Neutral
Our view: Overall, we view DRI's Q3/24 results as neutral for the shares as Q3/24 total income and cash royalty receipts were slightly ahead of estimates while adj. EBITDA was slightly below estimates. Total income of $41.6MM was ~4% above FactSet consensus estimates ($39.9MM) and ~2% above RBCe ($40.9MM). Cash royalty receipts of $38.9MM were ~3% ahead of Visible Alpha consensus ($37.7MM) and ~6% ahead of RBCe ($36.8MM). Adj. EBITDA of $31.3MM was ~6% below FactSet consensus ($33.2MM) and ~2% below RBCe ($31.9MM). On the earnings call tomorrow, we would seek updates on the existing portfolio of royalties, especially the large royalty assets that are marketed by private companies (Orserdu and Omidria). Following the recent royalty transaction on an unapproved drug, sebetralstat (PDUFA date: June 17, 2025), we expect the focus to be on the company's deal pipeline and the development stage of the drugs under consideration (Ph3, approved drugs) and management's return expectations for future royalty acquisitions.
Total income (revenues) and cash royalties ahead of consensus and RBCe. DRI reported total income of $41.6MM, ~4% ahead of FactSet consensus ($39.9MM) and ~2% ahead of RBCe ($40.9MM). This royalty income should drive royalty receipts over the coming quarters once payment lags of one to three quarters under DRI’s royalty agreements are considered. DRI reported total cash royalty receipts of $38.9MM, ~3% above Visible Alpha consensus of $37.7MM and ~6% above RBCe ($36.8MM).
Q3/24 adj. EBITDA of $31.3MM was below FactSet consensus ($33.2MM) and RBCe ($31.9MM). The adj. EBITDA margin of ~80% increased q/q (~77% in Q2/24). The management fee during the quarter (~$1.5MM) was lower than the usual 6.50% of cash receipts due to a partial one-time waiver of ~$1.1MM (C$1.5MM) by the manager to cover a portion of the investigation expenses incurred by the Trust. The company recorded a further impairment of ~$0.9MM related to the Oracea royalty asset in Q3 (~$6.1MM in 9MCY24). The net book value of the Oracea royalty asset as at September 30, 2024 was $15.4MM (~2.1% of net book value of royalty assets as of Q3/24). The Oracea royalty asset could potentially see further impairment given the "at-risk" launch by generic companies. Oracea represents ~1.1% of RBCe gross NAV (last published). On September 5, 2024, the Federal Circuit heard oral arguments in the Lupin appeal. DRI management expects a decision in the coming quarters.
Balance sheet, NCIB and dividend update. DRI ended Q3/24 with cash on hand of $89.4MM and had drawn $231.3MM under its credit facility as of Q3/24 (vs. $481.6MM in total available credit, which was increased to $631.6MM post-qtr). QTD in Q4, DRI has deployed $157MM in royalty acquisitions (Casgevy: $57MM, sebetralsta: $100MM) and $5MM in a private placement equity investment transaction. The company paid its previously announced regular dividend of $0.085/unit on 18-October to unitholders of record as of 30-September-2024. Today, it declared a cash dividend of $0.085/unit for Q4/24 payable on 20-January-2025 to unitholders of record on 31-December-2024. During the quarter, DRI repurchased 198,746 units at an average price of C$11.92 ($8.72), for a total consideration of ~$1.7MM.
Tomorrow's conference call. We would look for updates on the existing portfolio of royalties including the large royalty assets in the company's portfolio that are marketed by private companies (Orserdu and Omidria). Additionally, we expect the focus to be on the company's deal pipeline, management's return expectations for future royalty acquisitions, any changes in the competitive landscape and management's ability to continue to pursue accretive royalty acquisitions.
Call details: Tomorrow (07-November) at 8:00AM ET. Dial-in: 1-888-699-1199 or 416-945-7677. Webcast link here.