Huge stride towards an evergreen model

Mercia Asset Management 5 December 2019 Update
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Mercia Asset Management

Huge stride towards an evergreen model

Interims + M&A

Investment companies

5 December 2019

Price

28.3p

Market cap

£86m

Net cash (£m) at 30 September 2019

17.8

Shares in issue (excludes placing, NVM shares)

303.3m

Free float

47.3%

Code

MERC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.1

(4.1)

(7.2)

Rel (local)

2.7

(3.7)

(10.8)

52-week high/low

38.7p

23.1p

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 events

General Meeting

20 December 2019

Expected completion of NVM acquisition

27 December 2019

Preliminary results

July 2020

Analysts

Richard Williamson

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

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

In parallel with its H120 interim results, Mercia has announced the acquisition of NVM’s VCT business for up to £25m in cash and equity, funded by a £30m placing at 25p per share (a 22% discount). Subject to shareholder approval, the acquisition increases AUM to £760m and moves Mercia towards being the UK’s number one regional investor. The deal expands Mercia’s shareholder register, further dilutes existing major shareholders and means Mercia should be profitable before fair value adjustments, closer to its target of an evergreen model (c £1bn AUM). In its H120 results, Mercia’s direct investment portfolio increased to £102.0m, with £11.1m of cash invested in 16 companies and a fair value uplift of £3.2m. Mercia has £17.8m of unrestricted balance sheet cash (pre-placing) and the shares continue to trade at a significant discount to NAV.

Period end

Net cash* (£m)

Direct
investments (£m)

FUM
(£m)

NAV
(£m)

NAV per share (p)

P/NAV
(x)

03/17

59.6

52.0

336.5

121.4

40.0

0.71

03/18

49.4

66.1

400.0

123.5

40.7

0.70

03/19

29.8

87.7

381.0

126.1

41.6

0.68

09/19

17.8

102.0

361.3

128.4

42.3

0.67

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

Interim results

Mercia reported H120 net assets of £128.4m (FY19: £126.1m). The direct investment portfolio grew by 16.4% to £102.0m (FY19: £87.7m), with £11.1m of cash invested in 16 companies and a fair value uplift of £3.2m. Funds under management fell 5.2% to £361m and net expenses rose to £0.9m (H119: £0.7m). Management reiterated its strategic plan to double AUM to c £1bn and achieve an evergreen balance sheet by end FY22.

Acquisition of NVM VCT Fund management contracts

Mercia also announced the acquisition of NVM’s VCT business for up to £25m, comprising £16.6m upfront (75%/25% cash/equity) and a three-year deferred contingent consideration of £8.4m (75%/25% cash/equity). The acquisition brings AUM of £270m, increasing Mercia’s total AUM (H120: £490m) by c 50% to £760m. The deal is expected to be earnings enhancing in FY21, funded by a £30m institutional placing at 25p per share, a 22% discount to the closing price of 32p on 2 Dec 2019. Funds will be used to meet the initial cash payment for the acquisition, with the remainder (net of expenses) used to strengthen the balance sheet.

Valuation: NAV discount does not reflect progress

With the acquisition of NVM’s VCT business, Mercia has made significant strides towards becoming the UK’s number one regional investor and achieving an evergreen balance sheet. In the process it has extended its cash runway, strengthened its share register, increased the free float and reduced its perceived share overhang. Yet Mercia’s shares continue to trade at a discount to NAV (0.67x, 0.80x adjusted for the placing and acquisition), even before considering the embedded value of Mercia’s fund management business (an additional c 12p).

Half year results

A steady rise in net assets

Mercia reported a net asset value of £128.4m (FY19: £126.1m) or 42.3p per share (FY19: 41.6p), representing a small rise of 2% in H120. Direct investment of £11.1m was made into 16 portfolio companies (H119: £9.2m, 11 companies) during the period, including one new direct investment of £0.5m into Clear Review (HR and performance management software). Unrestricted cash and short-term liquidity investments fell to £17.8m (FY19: £29.8), although this will be supplemented by proceeds from the share placing (we estimate c £15m net of the initial cash payment for NVM and net of expenses) assuming the acquisition is approved at the general meeting set for 20 December 2019.

Funds under management (FUM) fell by 5.2% to £361.3m (FY19: £381.0m), partly attributable to the final winding up of the successful RisingStars Growth Fund (lifetime IRR of 15%, total value to paid-in capital (TVPI) of 528%), as well as returns from a mature PE fund (2.4x return, 19% IRR).

Group revenues increased by 5.1% to £5.5m (H119: £5.3m), while net expenses rose to £0.9m (H119: £0.7m), due to investment in a central services platform, internal corporate advisory and the increase in headcount reported at FY19 to manage prior fund mandate wins.

Management also reiterated its intention to achieve a profitable trading position (which the acquisition of the NVM VCT business delivers) and an evergreen balance sheet.

Portfolio review: Direct investment up 16.4% from FY19

Mercia invests in growing both its pipeline and its existing portfolio companies through four pools of capital under management: balance sheet (NAV of £128m, including £102m portfolio fair value and £18m unrestricted cash), venture (£210m), private equity (£60m) and debt (£91m). In aggregate, the company manages assets under management (AUM) of c £490m, of which third-party FUM, accruing management fees, represent £361m.

Exhibit 1: Breakdown of AUM

Source: Mercia Asset management, Edison Investment Research

Mercia’s direct investment portfolio grew by 16.4% to £102.0m (FY19: £87.7m), with £11.1m of cash invested in 16 companies (H119: £9.2m, 11 companies) and a fair value uplift of £3.2m (H119: £2.6m). Similar to previous reporting periods, Mercia’s top 20 direct investments represented 97.5% of total portfolio value (FY19: 98.4%), with a single new direct investment during the period (Clear Review) and Concepta dropping out of the top 20 holdings.

Notable fair value uplifts since FY19 have included: Voxpopme (£2.0m) – a common holding with NVM; Oxford Genetics (£1.6m); Crowd Reactive (£0.5m); Intechnica (£0.5m); and Soccer Manager (£0.1m), whose prospects improved with an acceleration in revenues following an intervention by Mercia. Holdings that attracted a write-down in value included PsiOxus (£0.3m) and The Native Antigen Company (£0.2m).

Mercia’s major H120 cash investments included:

Voxpopme – £2.0m in a £7.5m syndicated round to fund overseas expansion

Locate Bio – £1.8m of a £2.0m syndicated round

Medherant – £1.5m of a £2.4m syndicated round

Warwick Acoustics – £1.1m to allow continued automotive product development

Clear Review – a new £0.5m direct investment focused on the HR technology sector

Exhibit 2 below sets out the latest portfolio analysis.

Exhibit 2: Mercia’s direct investment portfolio

Company

Sector

Net value
1/4/18

Net value
1/4/19

Net cash invested H120

Fair value change
H120

Net value
30/9/19

Holding at
30/9/19

Total equity valuation
30/9/19

£000

£000

£000

£000

£000

%

£000

 

 

nDreams Ltd

Digital/digital entertainment

12,979

15,120

-

-

15,120

37.1

40,755

Oxford Genetics (OXGENE)

Life sciences/biosciences

9,090

10,161

-

1,582

11,743

30.2

38,884

Warwick Acoustics Ltd

EMME

6,152

7,904

1,065

-

8,969

52.9

16,955

Intechnica Ltd

Software and the internet

4,021

6,677

-

509

7,186

27.5

26,131

Voxpopme Ltd

Software and the internet

1,000

3,026

2,000

2,015

7,041

17.1

41,175

Medherant Ltd

Life sciences/biosciences

3,453

5,205

1,500

-

6,705

31.1

21,559

Impression Technologies Ltd

EMME

3,107

5,381

600

-

5,981

31.5

18,987

Ton UK (Intelligent Positioning)

Software and the internet

4,216

5,473

250

-

5,723

28.2

20,294

VirtTrade Ltd t/a Avid Games

Digital/digital entertainment

2,538

3,938

400

-

4,338

28.1

15,438

Faradion Ltd

EMME

1,299

3,525

500

-

4,025

16.4

24,543

The Native Antigen Company

Life sciences/biosciences

1,942

2,863

-

(184)

2,679

30.6

8,755

Soccer Manager Ltd

Digital/digital entertainment

1,199

2,099

300

135

2,534

34.8

7,282

Crowd Reactive Ltd

Software and the internet

1,650

1,589

214

517

2,320

22.6

10,265

Edge Case Games Ltd

Digital/digital entertainment

2,000

2,300

-

-

2,300

21.2

10,849

Locate Bio Ltd

Life sciences/biosciences

-

500

1,750

-

2,250

17.4

12,931

PsiOxus Therapeutics Ltd

Life Sciences/biosciences

2,377

2,377

160

(344)

2,193

1.5

146,200

sureCore Ltd

EMME

1,500

1,834

333

-

2,167

22.0

9,850

LM Technologies Ltd

EMME

1,913

1,913

250

-

2,163

39.4

5,490

Eyoto Group (Aston Eyecare)

Life sciences/biosciences

1,750

1,755

250

-

2,005

15.7

12,771

W2 Global Data Solutions Ltd

Software and the internet

-

2,000

-

-

2,000

15.2

13,158

Other direct investments

-

430

2,019

1,553

(993)

2,579

-

 

Total

 

62,616

87,659

11,125

3,237

102,021

-

 

Source: Mercia Asset Management. Note: EMME is Electronics, Materials, Manufacturing and Engineering. Excludes post year-end investments.

Acquisition of NVM VCT business

Alongside, its interim results, Mercia also announced the acquisition of the VCT fund management business from NVM, including the fund management contracts for Northern Venture Trust PLC, Northern 2 PLC VCT and Northern 3 PLC VCT, which together consist of c 60 portfolio companies, including 17 listed companies, 27 private venture companies and 16 private equity companies. The consideration is up to £25m, comprising £16.6m upfront (75/25 cash/equity) and a three-year deferred contingent consideration of £8.4m (75/25 cash/equity) – a two-thirds, one-third split. The acquisition increases Mercia’s total AUM (H120: £490m) by £270m, c 50%, to £760m.

The implied multiples assume a maximum consideration of 3.5x revenue (based on pro forma revenues of £7.2m to March 2019) and 6.25x pro forma EBITDA/net income to March 2019 (£4.0m). The deal is expected to be earnings enhancing in FY21 and will be funded by a £30m institutional placing at 25p per share, a 22% discount to the closing price of 32p on 2 December 2019, conditional on shareholder approval at a general meeting set for 20 December 2019. Funds will be used to meet the initial cash payment for the acquisition (£12.4m), with the remaining c £15m (net of expenses) used to strengthen the balance sheet.

Exhibit 3: Pro forma NVM deal analysis

Mercia Asset Management

NVM VCT

Pro forma

Uplift

£m

£m

£m

%

Turnover

10.7

7.2

17.9

67

Net income

(1.4)

4.0

2.6

nm

Assets under management (AUM)

490

270

760

55

Source: Mercia Asset management, Edison Investment Research

The acquisition of the NVM VCT fund management contracts represents a carve-out of the VCT funds from NVM Private Equity, with a team of nine specialist staff transferring across.

As well as the strategic benefits of the deal (increased scale, an additional investment product, an enhanced team, a portfolio of more mature VCT investee companies), NVM also brings additional revenue (£7.2m, of which £6.3m is recurring revenue) that means the combined business will be profitable before fair value adjustments, realisation gains, amortisation and share based payment charges. This removal of the monthly cash burn is a significant step towards Mercia developing a fully sustainable model, with management targeting an evergreen model by FY22.

Both Mercia and NVM are significant regional investors in UK technology, with some portfolio overlap (eg Voxpopme). As such, Mercia has added a VCT string to its bow and in the process cemented its position as the ‘number one regional provider of capital to SMEs’.

Exhibit 4: NVM and Mercia, the number one regional provider of capital to SMEs

Source: Mercia Asset Management

Significant reduction in the share overhang

Following two recent block trades, one at the end of October (at 25p) and the other in early November (at 27p), we understand that a substantial part of the overhang over Mercia’s shares has now been resolved. Following the intervention by Link Fund Solutions, BlackRock (now managing the remaining Woodford Investment Management stake) has reduced its stake to c 11% and Invesco has also reduced its holding to c 19.5%.

Under the placing announced in parallel with the NVM VCT acquisition, we estimate these stakes will dilute further, to c 8% and 14%, respectively, assuming neither fund manager participates in the placing to a material extent.

Valuation does not reflect Mercia’s progress

In line with Mercia’s remit as a leading regional provider of supportive balance sheet, venture, private equity and debt capital in transaction sizes typically below £10m, we have broadened Mercia’s valuation peer group to include a range of specialist asset managers, direct private equity and venture capital investors, and reduced the IP commercialisation comparator group as the majority of these are balance sheet-only investors. With the growth of Mercia’s third-party fund management business, we will reconsider the most appropriate comparator universe in future notes.

In Exhibit 5, we include analysis for Mercia as at the end of H120 and then include adjustments for the placing and acquisition to provide a pro forma estimate of Mercia including the acquisition of the NVM VCT fund management contracts, assuming shareholder approval at the general meeting on 20 December 2019.

Post-acquisition, Mercia trades at a 20% discount to the adjusted H120 NAV (see Exhibit 5: adjusted for the placing and acquisition of NMV), below its technology peer group and well below the valuation of other specialist asset managers. In our view, this represents an unwarranted discount given the progress the business has made and the strength of its underlying operating model, and this also ignores the value of the embedded fund management business.

Exhibit 5: Peer group comparison

Price (p)

Market cap (£m)

NAV (£m) (last reported)

Cash/(debt) (£m)

NAV multiple

NAV per share (p)

Mercia Asset Management

32.0

97

128

18

0.76

42.3

Placing (net of expenses)

25.0

127

156

45

0.82

36.8

Theoretical post-placing price

30.0

127

NVM VCT Fund contracts

25.0

4

-

(12)

 

 

Mercia post placing + M&A

28.3

132

156

33

0.80

35.4

Specialist Asset Managers

Intermediate Capital

1548

4 500

1,427

1,126

3.1

500

Gresham House

571

159

89

12.9

1.9

300

Direct Technology investors

HgCapital

252.5

1,020

984

79

1.03

245.0

Augmentum FinTech

102.5

120

131

29

0.91

112.2

Draper Esprit

490.0

566

677

46

0.85

574.0

Oakley Capital

237

485

651

96

0.75

318.0

IP Group

59.9

634

1,172

71

0.54

110.6

Mean

0.82

Median

0.85

Source: Refinitiv data, Edison Investment Research. Note: Priced as at 4 December 2019.

Implications of an evergreen balance sheet

The acquisition of the NVM VCT business is already a transformative deal in that the additional revenue (and profit) that it brings (see Exhibit 3) means that Mercia no longer burns cash on an operational basis. This delivers the first part of management’s three-year strategic plan, to put Mercia on a sustainable footing – and also starts to deliver the scale that management believes will allow it to operate an evergreen model by FY22.

An evergreen model is where annual portfolio realisations are greater than net investment, meaning that Mercia will no longer be dependent on the market for further fund-raising, but will become self-sufficient and fully sustainable. Management believes that the headroom from the latest £30m fund-raising, together with organic growth and anticipated portfolio realisations, should be sufficient to achieve the goal of an evergreen balance sheet without the need for further recourse to the markets.

NAV excludes the embedded funds business

As set out in Exhibit 1 (even before the acquisition of the NVM VCT business), Mercia is now more of a fund manager with a direct investment arm (an 80/20 business split), than a direct investor with a fund management business.

As Mercia moves towards its goal of an evergreen balance sheet, this further underlines that the NAV-based valuation does not properly reflect the embedded value of Mercia’s growing fund management business, whose fees (post the acquisition of the NVM VCT business) will more than cover the group’s net expenses. Placing these fees (£17.9m) on a relatively conservative 3x EV/sales multiple implies a value of £54m or 12.2p per share (adjusted for the placing and the acquisition of the NVM VCT business) for Mercia’s fund management business (from 10.6p previously).

The 12.2p for the fund management business represents incremental value not captured under the existing NAV valuation methodology. Adjusting the NAV calculation for this embedded value would suggest that Mercia trades at an even deeper discount to fair value (0.59x) than a pure NAV calculation indicates.

In our view, this level of discount does not reflect either the strategic positioning of the portfolio, the probability of material exits in the next 12-18 months, or the strength of Mercia’s underlying operating model.

Exhibit 6: Financial summary

£000

2015

2016

2017

2018

2019

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

508

1,755

6,660

10,197

10,675

Cost of Sales

(10)

(79)

(92)

0

0

Gross Profit

498

1,676

6,568

10,197

10,675

Operating costs

(1,495)

(4,011)

(9,051)

(10,633)

(12,115)

Fair value changes

3,934

896

4,268

2,823

3,916

Realised gains

0

0

839

871

0

Normalised operating profit

 

 

2,937

(1,439)

2,624

3,258

2,476

Amortisation of acquired intangibles

0

(17)

(301)

(301)

(301)

Exceptionals

(1,018)

(372)

(1,125)

(1,125)

0

Share-based payments

(44)

(230)

(395)

(497)

(171)

Reported operating profit

1,875

(2,058)

803

1,335

2,004

Net Interest

93

361

186

274

562

Joint ventures & associates (post tax)

0

0

0

0

0

Profit Before Tax (norm)

 

 

3,030

(1,078)

2,810

3,532

3,038

Profit Before Tax (reported)

 

 

1,968

(1,697)

989

1,609

2,566

Reported tax

0

0

54

54

54

Profit After Tax (norm)

3,030

(1,078)

2,810

3,532

3,038

Profit After Tax (reported)

1,968

(1,697)

1,043

1,663

2,620

Minority interests

0

0

0

0

0

Discontinued operations

0

0

0

0

0

Net income (normalised)

3,030

(1,078)

2,810

3,532

3,038

Net income (reported)

1,968

(1,697)

1,043

1,663

2,620

Basic average number of shares outstanding (m)

212

212

224

302

303

EPS - basic normalised (p)

 

 

1.43

(0.51)

1.26

1.17

1.00

EPS - diluted normalised (p)

 

 

1.43

(0.51)

1.21

1.13

0.96

EPS - basic reported (p)

 

 

0.93

(0.80)

0.47

0.55

0.86

Dividend (p)

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

(-29.7)

245.5

279.5

53.1

4.7

Gross Margin (%)

98.0

95.5

98.6

100.0

100.0

Normalised Operating Margin

578.1

-82.0

39.4

32.0

23.2

BALANCE SHEET

Fixed Assets

 

 

27,121

50,103

63,693

77,428

98,724

Intangible Assets

2,455

11,815

11,514

11,213

10,912

Tangible Assets

49

145

151

145

153

Investments & other

24,617

38,143

52,028

66,070

87,659

Current Assets

 

 

54,349

31,730

64,576

53,965

31,180

Stocks

0

0

0

0

0

Debtors

716

798

747

1,057

782

Cash & cash equivalents

23,633

20,932

28,829

42,908

25,210

Short term liquidity investments

30,000

10,000

35,000

10,000

5,188

Current Liabilities

 

 

(631)

(1,521)

(6,698)

(7,760)

(3,730)

Creditors

(631)

(1,521)

(6,698)

(7,760)

(3,730)

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

(271)

(217)

(163)

(109)

Long term borrowings

0

0

0

0

0

Other long term liabilities

0

(271)

(217)

(163)

(109)

Net Assets

 

 

80,839

80,041

121,354

123,470

126,065

Minority interests

0

0

0

0

0

Shareholders' equity

 

 

80,839

80,041

121,354

123,470

126,065

CASH FLOW

Op Cash Flow before WC and tax

2,943

(1,406)

2,700

3,339

2,560

Working capital

(20)

650

5,250

(87)

(3,724)

Exceptional & other

(4,952)

(1,268)

(5,107)

(3,694)

(3,916)

Tax

0

0

0

0

0

Net operating cash flow

 

 

(2,029)

(2,024)

2,843

(442)

(5,080)

Capex

(27)

(113)

(82)

(75)

(92)

Acquisitions/disposals

(11,563)

(20,939)

(8,779)

(10,664)

(17,673)

Net interest

22

397

165

260

531

Equity financing

67,230

(22)

38,750

0

(196)

Dividends

0

0

0

0

0

Other

(30,000)

20,000

(25,000)

25,000

4,812

Net Cash Flow

23,633

(2,701)

7,897

14,079

(17,698)

Opening net debt/(cash)

 

 

(39)

(23,633)

(20,932)

(28,829)

(42,908)

FX

0

0

0

0

0

Other non-cash movements

(39)

0

0

0

0

Closing net debt/(cash)

 

 

(23,633)

(20,932)

(28,829)

(42,908)

(25,210)

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

(53,633)

(30,932)

(59,601)

(49,435)

(29,798)

Source: Mercia Asset Management

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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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

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

1,185 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

1,185 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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

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

1,185 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

1,185 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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