Good progress across the portfolio

Mercia Technologies 4 December 2018 Update
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Mercia Technologies

Good progress across the portfolio

H119 results

Investment companies

4 December 2018

Price

30.5p

Market cap

£93m

Net cash (£m) at 30 September 2018

38.3

Shares in issue

303.3m

Free float

23.2%

Code

MERC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.9)

(1.0)

(11.6)

Rel (local)

(1.8)

6.1

(8.0)

52-week high/low

43.5p

27.5p

Business description

Mercia Technologies is a leading player in the funding and scaling of high-growth businesses. Through its subsidiary managed funds (MFM) and its own balance sheet, Mercia provides a ‘complete capital solution’ to UK SMEs, with a focus on the Midlands and North UK.

Next event

2019 preliminary results

July 2019

Analysts

Victoria Pease

+44 (0)20 3077 5700

Richard Williamson

+44 (0)20 3077 5700

Mercia Technologies is a research client of Edison Investment Research Limited

Mercia’s H119 results reflected continued steady progress across the portfolio, with net assets rising slightly to £125.2m and FuM remaining stable at £394.9m. The direct investment portfolio increased 17.7% to £77.8m, reflecting £9.2m of cash investment as well as £2.6m fair value uplift. Key portfolio companies continue to deliver against commercial milestones and with c £60m of investment expected in FY19, Mercia is well positioned for further progress in FY19. The shares continue to trade at a significant discount to NAV (0.74x) and peer group comparators. 

Year end

Net cash* (£m)

Direct investments (£m)

FuM
(£m)

NAV
(£m)

NAV per share (p)

P/NAV
(x)

03/16

30.9

38.1

220.0

80.0

26.3

1.16

03/17

59.6

52.0

336.5

121.4

40.0

0.76

03/18

49.4

66.1

400.0

123.5

40.7

0.75

H119

38.3

77.8

394.9

125.2

41.3

0.74

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

17.7% growth in direct investment portfolio

Mercia reported H119 net assets of £125.2m, which compares to £123.5m at FY18. As a result of a £9.2m of investment and £2.6m fair value uplift, the direct investment portfolio grew to £77.8m from £66.0m at FY18. Within the Mercia Fund Managers (MFM) subsidiary, FuM remained steady at £394.9m (vs c £400m at FY18). Importantly, MFM also contributed the majority of £5.27m revenues at H119 (vs £4.85m in H118), with a 19.1% reduction in operating expenses to £0.69m vs the comparable period (£0.85m for H118). Mercia continues to expect to invest c £60m during FY19, of which £20-25m will be direct balance sheet investments.

Commercial traction in key companies

Within the £77.8m direct investment portfolio, four companies comprise 44% of the value, reporting significant commercial milestones during the period, including multi-million pound contracts for Oxford Genetics and nDreams. Warwick Acoustics received further funding from Mercia and Intechnica saw a 16.3% uplift in value. Also notable in the direct portfolio, Aston EyeTech signed a multi-million pound contract, while VirtTrade signed partnership agreements with both Formula 1 and Valiant Comics. Please see our October initiation for more information on the key portfolio businesses.

Valuation: 0.74x NAV, does not include MFM

Mercia’s shares trade at a meaningful discount to NAV (0.74x). This compares to its peers such as IP Group at 0.83x and Draper Esprit at 1.19x. We note that the simple NAV calculation does not include profits generated from the MFM business, which we estimate at a value of c 9p per share, which is unchanged from the initiation (bringing the total discount to NAV to 0.60x). Catalysts for a re-rating would include meaningful commercialisation of the direct investments and/or further successful exits.

Investment summary

Stable net assets and FuM

Mercia reported a net asset value of £125.2m at H119 (vs £123.5m at FY18), which equates to 41.3p per share. Largely as a result of a £9.2m direct investment, unrestricted cash and short-term liquidity investments fell from £49.4m at FY18 to £38.3m at H119. This is in line with expectations and management anticipates total direct investment of £20-25m for FY19.

The MFM subsidiary business reported FuM of £394.9m, which is in line with c £400m at FY18. The funds have £216m available capital to invest and MFM is currently investing c £25m pa from its venture funds. The aim is to create a healthy pipeline of investments, before making selective new direct balance sheet investments – so-called, ‘Emerging Stars’.

Group revenues increased by 8.7% to £5.3m and included £3.6m fund management fees, £0.5m initial management fees and £1.1m portfolio director fees. Accounting for the increased fee income, net expenses reduced to £0.7m (£0.9m at H118). The contribution from the MFM business is a key differentiator for Mercia, as central costs are minimised and balance sheet cash is largely directed towards growing the direct investment portfolio.

Direct investment portfolio up 17.7% vs prior year.

Mercia’s direct investment portfolio grew from £66.0m at FY18 to £77.8m at H119, with the value increasing due to £9.2m of investment, as well as a £2.6m net fair value increase.

£3.2m fair value gains resulted from uplifts for Faradion and Intechnica, based upon “third-party indications of market value”, an uplift at Voxpopme following a successful syndicated third-party investment round and an uplift at The Native Antigen Company as its profitable trading progresses.

£0.6m downward fair value movement: This reflects a £0.5m reduction in Concepta’s share price, as well as a £0.1m reduction in a small direct investment, where Mercia elected not to provide further funding. In total, 10% of the portfolio has been subject to impairments.

Edge Case Games sold post period end: following a disappointing relaunch of its title Fractured Space during the summer, Edge Case Games was sold in an asset and royalty deal to Wargaming. Over £1.0m was returned to Mercia up-front, with deferred consideration of up to $10m possible over time. 

Two new Emerging Stars brought across from MFM: Mercia has invested £0.5m into Locate Bio (regenerative medicine) and £2.0m into W2 Global Data Solutions (W2 was post period end).

Similar to previous reporting periods, Mercia’s top 20 direct investments represented 98.7% of total portfolio value (includes Edge Case Games, excludes W2 Global Data Solutions and Locate Bio).

Milestones achieved

Significant commercial milestones achieved by direct investment portfolio companies include:

Oxford Genetics won its largest multi-million pound contract to date with a global e-commerce provider of reagents and tools to the research and clinical community.

nDreams won its largest multi-million pound contract to date with a high-profile global technology company.

Aston EyeTech (trading as Eyoto) won its largest multi-million pound contract to date with one of the fastest growing optical retailers in the world.

VirtTrade signed partnership agreements with both Formula 1 and Valiant Comics to develop digital collectibles content.

Please see our note, Realising value for more information on the key portfolio businesses.

Exhibit 1: Direct investment portfolio

(£'000)

Sector

Net value 1/4/18

Net cash invested in H119

Fair value change H119

Net value 30/9/18

% held at 30/9/18

nDreams Ltd

Digital/digital entertainment

12,979

-

-

12,979

45.6

Oxford Genetics Ltd

Life sciences/biosciences

9,090

-

-

9,090

40.5

Warwick Acoustics Ltd

EMME

6,152

1,000

-

7,152

64

Intechnica Ltd

Software and the internet

4,021

-

656

4,677

27.9

Impression Technologies Ltd

EMME

3,107

1,500

-

4,607

31.4

Ton UK Ltd t/a Intelligent Positioning

Software and the internet

4,216

-

-

4,216

28.8

Faradion Ltd

EMME

1,299

600

1,625

3,524

18.1

Medherant Ltd

Life sciences/biosciences

3,453

-

-

3,453

31.9

Smart Antenna Technologies Ltd

EMME

2,148

1,200

-

3,348

32.2

Edge Case Games Ltd

Digital/digital entertainment

2,000

1,150

-

3,150

21.2

VirtTrade Ltd

Digital/digital entertainment

2,538

550

-

3,088

28.4

Voxpopme Ltd

Software and the internet

1,000

1,500

526

3,026

21.8

PsiOxus Therapeutics Ltd

Life Sciences/biosciences

2,377

-

-

2,377

1.5

The Native Antigen Company Ltd

Life sciences/biosciences

1,942

-

382

2,324

32.7

LM Technologies Ltd

EMME

1,913

-

-

1,913

41.4

sureCore Ltd

EMME

1,500

334

-

1,834

24.4

Aston EyeTech Ltd t/a Eyoto

Life sciences/biosciences

1,750

-

-

1,750

18.7

Crowd Reactive Ltd

Software and the internet

1,650

(13)

-

1,637

26.2

Soccer Manager Ltd

Digital/digital entertainment

1,199

300

-

1,499

31.6

Concepta Plc

Life sciences/biosciences

1,306

365

-468

1,203

18.2

Other direct investments

-

430

670

-120

980

n/a

Total

 

66,070

9,156

2,601

77,827

n/a

Source: Mercia Technologies: Note. EMME is Electronics, Materials, Manufacturing and Engineering

Exhibit 2: Financial summary

£'000

2014

2015

2016

2017

2018

31-March

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

723

508

1,755

6,660

10,197

Cost of Sales

(26)

(10)

(79)

(92)

0

Gross Profit

697

498

1,676

6,568

10,197

Operating Profit (before amort. and except.)

 

42

2,937

(1,439)

2,624

3,258

Amortisation of acquired intangibles

0

0

(17)

(301)

(301)

Fair value changes

0

3,934

896

4,268

2,823

Realised gains

0

0

839

871

Exceptionals

0

(1,018)

(372)

(1,125)

(1,125)

Share-based payments

0

(44)

(230)

(395)

(497)

Reported operating profit

42

1,875

(2,058)

803

1,335

Net Interest

0

93

361

186

274

Joint ventures & associates (post tax)

0

0

0

0

0

Profit Before Tax (norm)

 

 

42

3,030

(1,078)

2,810

3,532

Profit Before Tax (reported)

 

 

42

1,968

(1,697)

989

1,609

Reported tax

0

0

0

54

54

Profit After Tax (norm)

42

3,030

(1,078)

2,810

3,532

Profit After Tax (reported)

42

1,968

(1,697)

1,043

1,663

Minority interests

0

0

0

0

0

Discontinued operations

0

0

0

0

0

Net income (normalised)

42

3,030

(1,078)

2,810

3,532

Net income (reported)

42

1,968

(1,697)

1,043

1,663

Average Number of Shares Outstanding (m)

13

212

212

224

301

EPS - normalised (p)

 

 

0.33

1.43

(0.51)

1.26

1.17

EPS - diluted normalised (p)

 

 

0.33

1.43

(0.51)

1.26

1.17

EPS - basic reported (p)

 

 

0.33

0.93

(0.80)

0.47

0.55

Dividend (p)

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

(-29.7)

245.5

279.5

53.1

Gross Margin (%)

96.4

98.0

95.5

98.6

100.0

Normalised Operating Margin

5.8

578.1

-82.0

39.4

32.0

BALANCE SHEET

Fixed Assets

 

 

27

27,121

50,103

63,693

77,428

Intangible Assets

0

2,455

11,815

11,514

11,213

Tangible Assets

27

49

145

151

145

Investments & other

0

24,617

38,143

52,028

66,070

Current Assets

 

 

223

54,349

31,730

64,576

53,965

Stocks

0

0

0

0

0

Debtors

184

716

798

747

1,057

Cash & cash equivalents

39

23,633

20,932

28,829

42,908

Short term liquidity investments

0

30,000

10,000

35,000

10,000

Current Liabilities

 

 

(141)

(631)

(1,521)

(6,698)

(7,760)

Creditors

(141)

(631)

(1,521)

(6,698)

(7,760)

Tax and social security

0

0

0

0

0

Short term borrowings

0

0

0

0

0

Other

0

0

0

0

0

Long Term Liabilities

 

 

0

0

(271)

(217)

(163)

Long term borrowings

0

0

0

0

0

Other long term liabilities

0

0

(271)

(217)

(163)

Net Assets

 

 

108

80,839

80,041

121,354

123,470

Minority interests

(0)

0

0

0

0

Shareholders' equity

 

 

108

80,839

80,041

121,354

123,470

CASH FLOW

Op Cash Flow before WC and tax

46

2,943

(1,406)

2,700

3,339

Working capital

(28)

(20)

650

5,250

(87)

Exceptional & other

0

(4,952)

(1,268)

(5,107)

(3,694)

Tax

0

0

0

0

0

Net operating cash flow

 

 

18

(2,029)

(2,024)

2,843

(442)

Capex

(30)

(27)

(113)

(82)

(75)

Acquisitions/disposals

0

(11,563)

(20,939)

(8,779)

(10,664)

Net interest

0

22

397

165

260

Equity financing

(4)

67,230

(22)

38,750

0

Dividends

0

0

0

0

0

Other

0

(30,000)

20,000

(25,000)

25,000

Net Cash Flow

(16)

23,633

(2,701)

7,897

14,079

Opening net debt/(cash)

 

 

(54)

(39)

(23,633)

(20,932)

(28,829)

FX

0

0

0

0

0

Other non-cash movements

0

(39)

0

0

0

Closing net debt/(cash)

 

 

(39)

(23,633)

(20,932)

(28,829)

(42,908)

Closing net debt/ (cash) inc short-term liquidity investments (not EIS)

(39)

(53,633)

(30,932)

(59,601)

(49,435)

Source: Mercia Technologies

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This report has been commissioned by Mercia Technologies and prepared and issued by Edison, in consideration of a fee payable by Mercia Technologies. 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 Edison analyst 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.

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General disclaimer and copyright

This report has been commissioned by Mercia Technologies and prepared and issued by Edison, in consideration of a fee payable by Mercia Technologies. 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 Edison analyst 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 2018 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). 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

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

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

Neither this Communication nor any copy (physical or electronic) of it may be (i) taken or transmitted into the United States of America, (ii) distributed, directly or indirectly, in the United States of America or to any US person (within the meaning of regulations Regulation S made under the US Securities Act 1933, as amended), (iii) taken or transmitted into or distributed in Canada, Australia, the Republic of Ireland or the Republic of South Africa or to any resident thereof, except in compliance with applicable securities laws, (iv) taken or transmitted into or distributed in Japan or to any resident thereof for the purpose of solicitation or subscription or offer for sale of any securities or in the context where the distribution thereof may be construed as such solicitation or offer, or (v) or taken or transmitted into any EEA state other than the United Kingdom. Any failure to comply with these restrictions may constitute a violation of the securities laws or the laws of any such jurisdiction. The distribution of this Communication in or into other jurisdictions may be restricted by law and the persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

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

295 Madison Avenue, 18th Floor

10017, New York

US

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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