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FY21 a breakthrough year, with more to come

Mercia Asset Management 7 July 2021 Update
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Mercia Asset Management

FY21 a breakthrough year, with more to come

FY21 results

Investment companies

7 July 2021

Price

37.5p

Market cap

£165m

Net cash (£m) at 31 March 2021

54.7

Shares in issue

440.1m

Free float

69.1%

Code

MERC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

12.6

22.0

90.1

Rel (local)

11.2

14.7

58.5

52-week high/low

37.5p

17.8p

Business description

Mercia Asset Management is a regionally focused specialist asset manager. Its stated intent is to become the leading regional provider of supportive balance sheet, venture, private equity and debt capital in transaction sizes typically below £10m.

Next event

AGM

September 2021

Half-year results

December 2021

Analysts

Richard Williamson

+44 (0)20 3077 5700

Rob Murphy

+44 (0)20 3077 5700

Mercia Asset Management is a research client of Edison Investment Research Limited

FY21 was the year Mercia’s business model as a specialist asset manager matured. The group largely achieved its FY22 strategic goals a year ahead of target (assets under management, AUM, of c £1bn, evergreen balance sheet and sustainable profitability), with NAV per share climbing 24% y-o-y to 40p and AUM rising 18% y-o-y to £940m at year end. Given this progress, a new plan has been set, Mercia 20:20, aiming for average annual growth in AUM of 20% and average PBT of £20m between FY22 and FY24. Mercia is now profitable (FY21 EPS of 7.83p, a 4.8x P/E), with an FY21 dividend yield of 1.1%. Despite evident progress, Mercia’s shares continue to trade at a discount to NAV (0.94x), even before considering the embedded value of the third-party fund management business (c 6.9p/share at 4% of AUM).

Period end

Net cash* (£m)

Direct
investments
(£m)

FUM
(£m)

NAV
(£m)

NAV per share (p)

P/NAV
(x)

03/19

29.8

87.7

381.0

126.1

41.6

0.90

03/20

30.2

87.5

658.0

141.5

32.1

1.17

09/20**

24.9

101.6

722.0

149.9

34.1

1.10

03/21

54.7

96.2

764.0

176.0

40.0

0.94

Note: *Includes liquid securities but not funds held on behalf of EIS investors. **H121 interim results

FY21 results: 84% y-o-y rise in revenues

Mercia reported an 18% rise in AUM to c £940m, with a 16% rise in funds under management (FUM) to £764m. This growth contributed to revenues increasing 84% to £23.4m (ex performance fees, y-o-y revenue growth was 51%), reflecting a full-year contribution from the NVM VCT fund management contract. Adjusted operating profit increased to £3.3m. With £30.0m of fair value changes and realised gains (including an £18m cash gain on the sale of OXGENE), Mercia delivered FY21 PBT of £34.0m and EPS of 7.83p. Mercia reported net assets of £176.0m or 40.0p per share, a rise of 24% over the year, with four realisations in FY21. The company ended the year with £54.7m of unrestricted cash and short-term liquidity investments, as well as total group liquidity of £314m.

Revised strategic goals: Mercia 20:20 vision

Having substantially achieved the goals set out in its prior three-year strategy to FY22 a year ahead of schedule, the board has set a new a three-year plan, Mercia 20:20. This targets growth in AUM of 20% per year on average over FY22–24, as well as average PBT of £20m per year over the period. Assuming Mercia can achieve these strategic objectives, it should deliver substantial shareholder returns. As well as organic growth, we expect Mercia to consider potential M&A opportunities to accelerate growth.

Valuation: 40p NAV + c 6.9p for fund management

Mercia’s shares continue to trade at a discount to NAV (0.94x) and its peers. This is before considering the incremental value of the fund management business, which we estimate could add at least an additional c 6.9p per share to the FY21 NAV of 40.0p. Based on Mercia’s current share price of 37.5p, the shares trade on an FY21 P/E of 4.8x and offer a 1.1% yield.

FY21 results

Strong, sustainable, profitable growth

FY21 was a year of organic growth, hampered initially by the impact of the COVID-19 pandemic but benefiting significantly from the first full-year contribution from the NVM VCT fund management business (acquired in December 2019) and the ‘super-profits’ from portfolio company realisations – principally the £18m cash gain made from the sale of OXGENE (covered in more detail in The UK’s top regional investor).

Mercia reported a 16% rise in FUM to £764m (FY20: £657m), contributing £18.2m in revenues (FY20: £11.7m). Overall group revenues increased by 84% to £23.4m (FY20: £12.7m), reflecting a full-year contribution from the NVM VCT fund management contract. Revenues comprised £13.1m from fund management fees, £1.4m from initial management fees, £3.1m from portfolio director fees as well as £4.2m of one-off performance-related fees arising from the NVM VCT funds. Performance-related fees aside, 85% of fee income from fund management and monitoring is contracted and recurring.

Administrative expenses rose by 31% to £16.6m (FY20: £12.7m), with staff costs increasing 22% to £10.7m (FY20: £8.8m), with the majority of the increase reflecting the incremental operating costs of the NVM VCT fund management business. Headcount increased by 8%, from 93 to 100 employees over the year. Despite the impact of COVID-19, no staff were furloughed or made redundant and Mercia did not receive any direct government support, although its portfolio companies received £11.8m in matched funding from the Future Fund.

Exhibit 1: Interview with Dr Mark Payton, Mercia Asset Management CEO

Source: Edison Investment Research

As a recognised metric for specialist asset managers, Mercia reports adjusted operating profit, the difference between revenues and total operating costs, excluding realised gains on disposal of investments, unrealised fair value movements, one-off items and non-cash charges. Adjusted operating profit excluding net performance fees increased to £3.3m (FY20: £0.5m) largely as a result of the first full-year contribution of the NVM VCT fund management business. With AUM expected to grow by 20% on average over each of the next three years (under Mercia 20:20) and assuming Mercia’s net fee income remains at c 2% of AUM, this suggests continuing revenue growth and strong growth in adjusted operating profits over the medium term. Reflecting £30.0m of fair value changes and realised gains (FY20: £15.8m fair value reduction), Mercia reported FY21 PBT of £34.0m (FY20: £17.5m loss) and EPS of 7.83p (FY20: 5.11p loss). At Mercia’s current share price of 37.5p, its shares are trading on an FY21 P/E ratio of 4.8x and with a proposed 0.3p final dividend, added to the 0.1p interim dividend, they offer a 1.1% dividend yield.

Although tax losses are not carried on the balance sheet, we understand Mercia’s historic tax losses are likely to be sufficient to offset taxable gains reported over the medium term, when taken together with the substantial shareholding exemption minimising tax on capital gains.

Mercia reported net assets of £176.0m (FY20: £141.5m) or 40.0p per share (FY20: 32.1p), a rise of 24% over the year. Net direct investments of £15.4m were made into 19 portfolio companies (FY20: £15.7m into 18 companies) during the year, including two new direct investments, Sense Biodetection and MIP Diagnostics. After the year end, Mercia invested a further £0.5m in Medherant and £0.3m in Eyoto, both existing direct investments.

The company ended the year with £54.7m of unrestricted cash and short-term liquidity investments (FY20: £30.2m) as well as total group unrestricted liquidity of £314m.

Portfolio review: £37m of cash realisations in FY21

Focusing on the direct investment portfolio, Mercia had 23 direct investments at 31 March 2021, with four exits during the year and two new investments. In line with previous reporting periods, Mercia’s top 20 direct investments represented 98.5% of total portfolio value at 31 March 2021, with the top 10 representing almost 80% of total portfolio value.

Exhibit 2: Mercia’s direct investment portfolio ordered by carrying value (£000s)

Company

Year of first direct investment

Net value
1/4/20

Net cash invested FY21

Realisations FY21

FY21 realised gains

FY21 fair value change

Net value
31/3/21

% held at
31/3/21

Holding as % of portfolio fair value

Cumulative % of total

1

nDreams

2014

16,120

1,000

-

-

606

17,726

35.4

18.4

18.4

2

Intechnica Group

2017

7,177

1,250

-

-

1,569

9,996

27.5

10.4

28.8

3

Voxpopme

2018

6,030

1,191

-

-

1,624

8,845

17.6

9.2

38.0

4

Impression Tech

2015

4,294

2,401

-

-

1,927

8,622

67.3

9.0

47.0

5

Medherant

2016

6,705

1,400

-

-

-

8,105

29.0

8.4

55.4

6

Faradion

2017

4,025

500

-

-

1,168

5,693

15.6

5.9

61.3

7

Intelligent Positioning

2015

4,354

750

-

-

(191)

4,913

29.9

5.1

66.4

8

MyHealthChecked

2016

475

504

-

-

3,509

4,488

14.6

4.7

71.1

9

Warwick Acoustics

2014

3,656

500

-

-

99

4,255

35.8

4.4

75.5

10

Soccer Manager

2015

2,534

775

-

-

244

3,553

39.0

3.7

79.2

11

Locate Bio

2018

2,250

750

-

-

6

3,006

16.7

3.1

82.3

12

Avid Games

2015

2,200

615

-

-

(3)

2,812

20.3

2.9

85.2

13

sureCore

2016

2,167

250

-

-

-

2,417

22.0

2.5

87.7

14

PsiOxus Therapeutics

2015

2,193

250

-

-

(36)

2,407

1.4

2.5

90.2

15

EdgeCase Games

2015

2,300

-

-

-

-

2,300

21.2

2.4

92.6

16

W2 Global Data

2018

2,000

300

-

-

-

2,300

16.3

2.4

95.0

17

Eyoto Group

2017

1,752

500

-

-

(439)

1,813

15.7

1.9

96.9

18

Sense Biodetection

2020

-

945

-

-

-

945

1.2

1.0

97.9

19

MIP Diagnostics

2020

-

300

-

-

2

302

3.3

0.3

98.2

20

LM Technologies

2015

250

-

-

-

-

250

47.4

0.3

98.5

OXGENE

2015

11,743

1,000

(30,696)

17,953

-

-

-

-

-

Native Antigen Co.

2015

3,493

-

(5,248)

1,755

-

-

-

-

-

Clear Review

2019

500

-

(1,043)

543

-

-

-

-

-

Other investments

 

1,253

216

-

-

3

1,472

-

0.3

1.5

Total

 

87,471

15,397

(36,987)

20,251

10,088

96,220

-

100.0

100.0

Source: Mercia Asset Management. Note: Entries in italics denote exits realised during FY21.

With asset values substantially recovering in H121, before continuing to move forward in a strong private company funding environment in H221, the value of Mercia’s direct investments rose to £96.2m (2020: £87.5m). This 10% increase came after FY21 net investment of £15.4m (FY20: £15.7m), as well as four cash realisations, returning £37.0m to the group, delivering £20.3m of realised gains: Crowd Reactive (-), The Native Antigen Company (£1.8m), Clear Review (£0.5m) and OXGENE (£18.0m), with a fair value of £15.9m at 31 March 2020.

Mercia continued to support its top holdings with two thirds of net direct investment allocated to the top 10 assets. This was topped up with a further £11.8m in matched funding from the Future Fund. The principal contributors to the £10.1m fair value gain were MyHealthChecked (£3.5m), Impression Technologies (£1.9m increase, after a £3.1m reduction in fair value in FY20), Voxpopme (£1.6m), Faradion (£1.2m), nDreams (£0.6m) and Soccer Manager (£0.2m).

The diagnostics, biotech and software sectors put in a strong performance in FY21, while certain businesses in deep tech and clean tech, including in the automotive sector, were negatively affected by the COVID-19 pandemic. However, the automotive-related assets, primarily Warwick Acoustics (£0.1m fair value gain in FY21) and Impression Technologies (£1.9m fair value gain), are now seeing renewed interest from original equipment manufacturers. Eyoto (remote platform eyecare) has experienced delays in Food and Drug Administration approval for its slit lamp product, which has affected revenues, necessitating a £0.4m write-down in fair value.

Fund overview

In aggregate, Mercia manages AUM of c £940m, of which third-party FUM account for over 80%, approximately £764m, operating through four pools of capital under management:

Balance sheet (£96.2m portfolio fair value, £54.7m unrestricted cash)

Venture (including NVM) (FUM £600m)

Private equity (FUM £54m)

Debt (FUM £110m).

Venture, including the NVM VCT fund management business, EIS and IP commercialisation, represents the majority (FY21: 64%) of the group’s AUM, with private equity (6%) and debt (12%) representing a much smaller proportion of overall funds. The remainder relates to the group’s balance sheet, the direct investment portfolio (10% of AUM), balance sheet cash (6% of AUM) and other (2% of AUM, principally intangible assets), set out in Exhibit 3.

Exhibit 3: Balance of Mercia’s business (FY21 breakdown of AUM)

Source: Mercia Asset Management, Edison Investment Research

Strategic goals: Mercia 20:20 vision

Having substantially achieved the goals set out in its prior three-year plan to FY22 a year ahead of schedule, Mercia’s board has set a revised three-year target, Mercia 20:20. It aims to:

grow AUM by an average of 20% per year over the next three years; and

deliver average PBT of £20m per year over the next three years.

If Mercia is able to achieve these strategic objectives, we would expect it to lead to substantial shareholder returns over the next three years.

Valuation: Fund management warrants a premium

As Mercia has successfully built its third-party fee-earning fund business, charging an average c 2% of AUM, it is now expected to generate a positive adjusted operating profit as it scales, allowing investors to attribute additional value to these earnings. Management has signalled the sustainability of this income stream (FY21: 85% of fund management and monitoring fees are contracted and recurring), by proposing a maiden dividend of 0.4p for FY21, offering a 1.1% dividend yield.

With annual AUM growth of 20% targeted over the next three years, generating incrementally larger revenues, we believe an NAV-based valuation alone no longer adequately reflects the additional value of the fund management business within Mercia.

We estimate the value of Mercia’s embedded fee-earning funds business at 4% of FUM (a conservative valuation considering Mercia’s attractive blended fee margins of 2%) in addition to the NAV-based valuation of its direct investment business. We provide a sensitivity analysis below highlighting the valuation impact for the funds business at 3% and 5% of FUM (Exhibit 4).

Exhibit 4: Valuation sensitivities

Base case

High case

FY21 FUM

£764m

£764m

Valuation of FM arm (as % of FUM)

3%

5%

Implied value of FM arm

£22.9m

£38.2m

Value per share

5.2p

8.7p

FY21 NAV per share

40.0p

40.0p

Implied hybrid valuation per share

45.2p

48.7p

Current share price

37.50p

37.50p

Current share price / hybrid valuation

83%

77%

Discount to hybrid valuation

17%

23%

Source: Edison Investment Research

With last reported FUM of £764m, this implies a valuation for the fund business of £23–38m, or c 5–9p per share. When added to the FY21 NAV of 40.0p per share, this implies a revised valuation of c 45–49p per share. Based on our hybrid approach, Mercia’s shares trade at a 17–23% discount to this valuation, based on the current share price.

Market waking up to private technology investment

Valuations of many of Mercia’s peers have risen significantly over the last 12 months, with portfolios based around technology and life sciences investments benefiting from strongly rising valuations following the initial impact of the COVID-19 pandemic.

A premium is often applied where the company owns an income-generating asset management arm (eg 3i, Gresham House, ICG, Mercia), whereas for many other direct investors, either the management vehicle is held separately from the investment vehicle (eg HgCapital, Oakley) or fees have yet to deliver structural profitability (eg Draper Esprit, IP Group).

Currently, Mercia trades at a 6% discount to the FY21 NAV (40.0p), with a number of its immediate peers trading at a premium to NAV. However, as we have set out above, we believe Mercia’s hybrid valuation, including the fund management business, lies between 45p and 49p per share, implying it is trading at a discount closer to 17–23%.

Exhibit 5: Peer group analysis

 

Price

Currency

Market cap (£m)

NAV (£m) (last reported)

Net cash / (debt) (m)

NAV per share (p)

NAV premium/ discount

Mercia Asset Management

36.0

GBp

158.4

176.0

55

40.0

0.90

 

 

 

 

 

 

 

 

Specialist asset managers

 

 

 

 

 

 

 

Gresham House

940.0

GBp

308.7

97

22

300.6

3.13

Intermediate Capital Group

2,204.0

GBp

6,296.0

1,617

297

566.0

3.89

 

 

 

 

Mean 

3.51

Direct investors

 

 

 

 

 

 

 

Augmentum FinTech

139.8

GBp

196.6

183

27

130.4

1.07

Draper Esprit

927.0

GBp

1,429.0

1,033

161

743.0

1.25

HgCapital

370.0

GBp

1,611.0

1,291

188

336.3

1.10

IP Group

118.0

GBp

1,265.0

1,332

203

125.3

0.94

Oakley Capital

362.0

GBp

654.0

728

223

403.0

0.90

TMT Investments

10.70

USD

312.3

178

23

6.53

1.64

Mean

1.15

Median

1.09

Source: Refinitiv. Note: Priced at 6 July 2021.

Decoupling from NAV and moving to P/E

As the fund management business grows, the link to NAV becomes less relevant, as highlighted by Gresham House and ICG (Exhibit 5), with these specialist asset managers trading on more than a 20x CY21 P/E multiple.

Based on an average PBT of £20m over the next three years as targeted under Mercia’s 20:20 vision, Mercia’s shares trade on an implied targeted average FY22–24 P/E of 8x. This assumes the tax charge over the period on a blend of income and realised gains (offset by the substantial shareholding exemption) can be substantially offset by the group’s historic tax-losses carried forward.

Given the group’s increasing scale, leading to growing profitability, the performance of its portfolio, its attractive underlying operating model and the initiation of a progressive dividend policy, this leaves scope for considerable share price upside as the valuation decouples from a simple NAV premium/discount.

Exhibit 6: Financial summary

31-March

£'000

2017

2018

2019

2020

2021

INCOME STATEMENT

IFRS

IFRS

IFRS

IFRS

IFRS

Revenue

 

 

6,660

10,197

10,675

12,747

23,410

Cost of Sales

(92)

0

0

0

0

Gross Profit

6,568

10,197

10,675

12,747

23,410

Operating costs

(9,051)

(10,633)

(12,115)

(12,661)

(16,554)

Adjusted operating profit/(loss)

 

 

(2,221)

(81)

(794)

518

3,337

Fair value changes

4,268

2,823

3,916

(15,844)

9,723

Realised gains

839

871

0

0

20,251

Normalised operating profit

 

 

2,624

3,258

2,476

(15,758)

36,830

Amortisation of acquired intangibles

(301)

(301)

(301)

(852)

(2,317)

Exceptionals

(1,125)

(1,125)

0

(695)

0

Share-based payments

(395)

(497)

(171)

(528)

(543)

Reported operating profit

803

1,335

2,004

(17,833)

33,970

Net Interest

186

274

562

220

48

Joint ventures & associates (post tax)

0

0

0

0

0

Profit Before Tax (norm)

 

 

2,810

3,532

3,038

(15,538)

36,878

Profit Before Tax (reported)

 

 

989

1,609

2,566

(17,613)

34,018

Reported tax

54

54

54

159

440

Profit After Tax (norm)

2,810

3,532

3,038

(15,538)

36,878

Profit After Tax (reported)

1,043

1,663

2,620

(17,454)

34,458

Net income (normalised)

2,810

3,532

3,038

(15,538)

36,878

Net income (reported)

1,043

1,663

2,620

(17,454)

34,458

Basic average number of shares outstanding (m)

224

302

303

341

440

EPS - diluted normalised (p)

 

 

1.21

1.13

1.00

(4.55)

8.38

EPS - basic reported (p)

 

 

0.47

0.55

0.86

(5.11)

7.83

Dividend (p)

0.00

0.00

0.00

0.00

0.40

Revenue growth (%)

279.5

53.1

4.7

19.4

83.7

Gross Margin (%)

98.6

100.0

100.0

100.0

100.0

Normalised Operating Margin

39.4

32.0

23.2

-123.6

157.3

BALANCE SHEET

Fixed Assets

 

 

63,693

77,428

98,724

124,899

131,171

Intangible Assets

11,514

11,213

10,912

36,705

34,388

Tangible Assets

151

145

153

125

107

Right of use assets

0

0

0

598

456

Investments

52,028

66,070

87,659

87,471

96,220

Current Assets

 

 

64,576

53,965

31,180

31,951

61,269

Stocks

0

0

0

0

0

Debtors

747

1,057

782

1,298

4,060

Unrestricted cash

28,829

42,908

24,581

23,971

54,491

Restricted cash

4,228

3,473

629

467

2,484

Short term liquidity investments

30,772

6,527

5,188

6,215

234

Current Liabilities

 

 

(6,698)

(7,760)

(3,730)

(6,659)

(9,827)

Creditors

(6,698)

(7,760)

(3,730)

(4,805)

(8,127)

Lease liabilities

0

0

0

(118)

(122)

Short term borrowings

0

0

0

0

0

Other (incl deferred consideration)

0

0

0

(1,736)

(1,578)

Long Term Liabilities

 

 

(217)

(163)

(109)

(8,731)

(6,592)

Long term borrowings

0

0

0

0

0

Lease liabilities

0

0

0

(473)

(351)

Other long term liabilities

(217)

(163)

(109)

(8,258)

(6,241)

Net Assets

 

 

121,354

123,470

126,065

141,460

176,021

Minority interests

0

0

0

0

0

Shareholders' equity

 

 

121,354

123,470

126,065

141,460

176,021

NAV per share

 

 

40.37

40.71

41.56

32.14

39.99

CASH FLOW

Op Cash Flow before WC and tax

2,700

3,339

2,560

(15,546)

37,042

Gain on sale of direct investments

(839)

(871)

0

0

(20,251)

Fair value movements in direct investments

(4,268)

(2,823)

(3,916)

15,844

(9,723)

Working capital

5,250

(87)

(3,724)

695

(1,457)

Exceptional & other

0

0

0

(695)

0

Depreciation of right-of-use assets

0

0

0

139

142

Tax

0

0

0

0

0

Net operating cash flow

 

 

2,843

(442)

(5,080)

437

5,753

Capex

(82)

(75)

(92)

(45)

(52)

Acquisitions/disposals

3,049

10,618

1,711

(12,400)

(2,100)

Net interest

165

260

531

245

68

Direct investments

(11,828)

(21,282)

(19,384)

(15,656)

21,590

Equity financing

38,750

0

(196)

30,000

0

Dividends

0

0

0

0

(440)

Other

(25,000)

25,000

4,812

(3,052)

5,843

Net Cash Flow

7,897

14,079

(17,698)

(471)

30,662

Opening net debt/(cash)

 

 

(20,932)

(28,829)

(42,908)

(24,581)

(24,110)

Other non-cash movements

0

0

(629)

0

0

Closing net debt/(cash)

 

 

(28,829)

(42,908)

(24,581)

(24,110)

(54,772)

Source: Mercia Asset Management

General disclaimer and copyright

This report has been commissioned by Mercia Asset Management and prepared and issued by Edison, in consideration of a fee payable by Mercia Asset Management. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Mercia Asset Management and prepared and issued by Edison, in consideration of a fee payable by Mercia Asset Management. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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