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Date : 04/08/2022

Why Deterra Royalties Ltd (ASX: DRR) is a Special Dividend Stock?

If YOU want to invest in a LOW-RISK Dividend Stock for the future, Deterra Royalties Ltd (ASX DRR) is your best shot!

Deterra Royalties Ltd (ASX: DRR) is a treat for investors looking for a low-risk commodity stock with a consistent dividend history. It’s not just the consistent dividend payouts that make it special, but its dividends are fully franked!

DRR: The Simplest Business Model

Deterra Royalties Ltd (ASX: DRR) is engaged in managing and growing a portfolio of royal assets across a range of commodities. As of now, the company has six royal assets in its portfolio. The flagship asset among them all, which brings the majority of the revenue, is Mining Area C or MAC. MAC is operated by the BHP Group Ltd (ASX: BHP).

For most readers who don’t know, Deterra Royalties Ltd (ASX: DRR) was spun out of Iluka Resources Limited (ASX: ILU).

So here comes the part about how Deterra Royalties Ltd (ASX: DRR) makes money from owning assets. The company gets 1.232% of all the money that Mining Area C, or MAC, makes.

If we put it in perspective, we can assume that Deterra will receive a payment in the form of a cheque by BHP in their mail at the end of each quarter. Deterra would go to the bank to credit the amount in its account. Deterra then pays nominal operating costs and taxes and pays out the remaining money to its shareholders as dividends. Easy-Peasy!

Deterra has a Net Profit Margin of 66%. It pays out all of this NPAT as dividends. For a quick comparison, Rio Tinto (ASX: RIO) has a net profit margin of 29%, and BHP Group (ASX: BHP) has a net profit margin of 25%. RIO and BHP also pay out only 50% of their NPAT as dividends. This makes Deterra the best dividend stock on the ASX among the miners.

Deterra’s Dividends Set to Increase

First, the revenue of Deterra positions it in an excellent spot. The main drivers of its revenue are Iron ore prices, MAC sales volume, and AUD/USD exchange rate.

MAC is an iron-rich mining site, and its expense for the operations to mine a tonne of iron ore is $20. Currently, there are four locations at MAC. Most of it is operated by BHP and is expected to continue future development and increase the royalty life. BHP had previously intended to continue operations at MAC till 2073.

MAC’s production volumes have been consistently increasing for the past year. Expansion of the mine is going ahead of plan, and these volumes will more than double in the coming years.

In the recent half-year, 2H22, Mining Area C production volumes were up 78% on the previous corresponding period and up 45% half on half as incremental production from the South Flank contributed to the overall production.

The South Flank project remains on track to increase Mining Area C (MAC) production volumes from 61.6 Mwt in 2021 to 145 Mwtpa over three years. Iron ore prices have recovered and come with a stable long-term outlook.

An increase in production results in increased net profits for Deterra. As we already know, Deterra pays out 100% of its net profits as dividends. This makes Deterra an outstanding dividend stock for long-term investors.

DRR: What Facts Should an Investor Consider?

You might assume if you must have to invest in a miner stock, then why don’t I go for any other blue-chip stock like Fortescue Metals Group Limited (ASX: FMG)? FMG recently paid a dividend of $11 billion to its shareholders.

Well, there are a couple of reasons for that. One DRR is a low-risk commodity stock; secondly, the company has huge revenues compared to its expenses. As a result, it leaves the company with a full bag of cash when closing half-year or yearly books.

Another essential point is that DRR takes a percentage of revenue, not profit. This essentially means DRR has no concerns about whether the mining site is profiting or not. They would simply get their cut on quarterly revenues. This is a win-win deal for Deterra.

Last but not least, the company was founded in 2020, and since then, the company has paid dividends three times, and that too fully franked.

DRR Recorded Some Insane Profit Margins in 1H22!

DRR is trading at $4.45, gaining 5% in the past month. It has a market cap of 2.35 Billion AUD.

asx drr

  • The company’s royalty revenue in 1H22 was $92.8 million, gaining 72% from revenue of $53.9 million in 1H21.
  • DRR incurred expenses of $9.6 million only.
  • Its Underlying EBITDA was $88.7 in 1H22, 86% YoY.
  • Its Underlying EBITDA margin was 96% in 1H22.
  • They paid a tax of $47 million.
  • Deterra’s Net Profit after Tax (NPAT) was $61.7 million, reflecting an insane gain of 85% from the NPAT of $33.34 in 1H21.
  • The company paid a fully franked dividend of 11.68 cents per share, an increase of 85% compared to the fully franked dividend paid in 1H21.

FY22 Dividend Yield will be 10%

fy22 divident forecast

For FY22, we think Deterra’s dividend yield will be 10%, fully franked. Deterra recently reported its production and revenue numbers for Q4.

For the whole of FY22, Deterra has generated $265 million, based on the 1.232% royalty it has received. The company has maintained a 66% NPAT margin quite consistently. Assuming that these margins continue, Deterra will have an NPAT of $175 million for FY22.

Based on the current number of shares outstanding, the final dividend for FY22 will be $0.33 a share. Additionally, Deterra paid out an interim dividend of $0.116 in March – taking Deterra’s dividends to $0.45.

At current price levels of $4.4 a share, Deterra’s FY22 dividend yield will reach north of 10%, fully franked.

DRR: What is the Outlook?

For the next 3 decades, Deterra expects MAC sales to reach 139 dry metric tonnes per year after the South Flank expansion is finished.

It reflects an increase of more than 2.4 times in production, eventually giving organic growth to the company.

All of this increased production will boost Deterra’s dividends.

 

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