Sustainable model remains undervalued

Mercia Asset Management 14 December 2021 Update
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Mercia Asset Management

Sustainable model remains undervalued

H122 results

Investment companies

14 December 2021

Price

37p

Market cap

£163m

Net cash (£m) at 30 September 2021

52.1

Shares in issue

440.1m

Free float

69%

Code

MERC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.3)

(9.2)

52.6

Rel (local)

0.7

(10.0)

36.7

52-week high/low

43.25p

23.60p

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

FY22 results

July 2022

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

After 18% growth in FY21, H122 assets under management (AUM) was up only marginally to c £948m, with nine exits resulting in distributions to investors of £39m. Net assets and NAV per share rose by 6% during the period to £186.4m and 42.4p, respectively. Revenue (excluding £2.6m of performance fees) increased 21% y-o-y to £10.1m (88% contracted and recurring) with EPS rising 35% y-o-y to 2.53p, leaving the group with net cash of £52m. Confidence in the sustainability of Mercia’s hybrid model allowed the board to triple the interim dividend to 0.3p per share - we estimate that the shares might offer a prospective FY22 yield of c 2% assuming a more conservative uplift in final dividend than in FY21. Mercia trades on a P/E of 7.3x annualised H122 EPS and at 0.87x H122 NAV, before considering the incremental value of the third-party funds business (we estimate 7p per share at 4% of funds under management).

Period end

Net cash* (£m)

Direct
investments (£m)

FUM
(£m)

NAV
(£m)

NAV per share (p)

P/NAV
(x)

03/20

30.2

87.5

658.0

141.5

32.1

1.15

09/20

24.9

101.6

722.0

149.9

34.1

1.09

03/21

54.7

96.2

764.0

176.0

40.0

0.93

09/21

52.1

110.3

762.0

186.4

42.4

0.87

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

H122 results: 21% revenue growth, dividend tripled

Revenue (excluding £2.6m of performance fees) increased 21% to £10.1m (H121: £8.4m, nil performance fee) and PAT increased 35% to £11.2m (H121: £8.2m). EPS increased 35% to 2.53p (H121: 1.87p). This strong performance left the group with cash and short-term liquidity investments of £52m (FY21: £55m). With increasing confidence in the sustainability of Mercia's hybrid investment model, the interim dividend was trebled to 0.3p per share (H121: 0.1p).

14% IRR since IPO, M&A anticipated

Management set out its strategic goals for 2022–24 in its Mercia 20:20 vision, including average annual growth in AUM of 20% over the period (closing AUM of £1.6bn by FY24) and average PBT of £20m per year, or total PBT of £60m over the three-year period. Mercia has delivered a direct investment portfolio IRR of 14% from its IPO in 2014 to 30 September 2021 and annual growth in NAV per share of over 24% over the last two years, following completion of the acquisition of the Northern VCT fund management business. Having demonstrated the success of this acquisition, we believe Mercia has the means (H122 cash of £52m) and the rationale to target further M&A in 2022 without recourse to the markets.

Valuation: 0.87x NAV, 7.3x annualised P/E, 2% yield

Mercia trades on an H122 NAV of 0.87x, towards the bottom of our field of direct investment peers. This is even before considering the incremental value of the third-party funds business (we estimate an additional 7p per share at 4% of FUM). However, specialist asset managers trade at multiples of NAV as their valuation is increasingly referenced to earnings multiples. Mercia trades on a P/E of 7.3x annualised H122 EPS (vs peers on 19x FY21 P/E) and, after the trebling of its interim dividend, we estimate Mercia will offer a prospective FY22 dividend yield of c 2%. Given the strength of Mercia’s business and its structural profitability, we believe Mercia remains undervalued at these levels.

H122 results

Fund returns omit investor distributions

AUM remained fairly flat at £948m in H122 (FY21: £940m), although still up 9% y-o-y (H121: £872m). However, this does not take account of distributions to investors in Mercia’s various funds, which totalled £39m in the period (H121: £4m) from nine successful exits. Third-party FUM were also largely unchanged in H122 at £762m (FY21: £764m), although up 6% y-o-y, with £38m of the overall £39m of investor distributions falling to third-party fund investors. Although these distributions do not flatter Mercia’s top line, they will be well received by investors and clearly strong returns are likely to encourage investors to consider investing further funds through Mercia.

Exhibit 1: H122 AUM breakdown

Exhibit 2: H122: 74 deals completed across all funds

Source: Mercia Asset Management

Source: Mercia Asset Management

Exhibit 1: H122 AUM breakdown

Source: Mercia Asset Management

Exhibit 2: H122: 74 deals completed across all funds

Source: Mercia Asset Management

Of FUM, 83% of funds are committed to various stages of venture (EIS, VCT, VC and proprietary capital) (Exhibit 1), with private equity (6%) and debt (11%) the remainder.

In June 2021, Mercia received a further £5m from the British Business Bank for the Midlands Engine early-stage proof of concept fund, together, post period-end, with £26m for the Northern Powerhouse activities (£15m equity, £11 debt). Exhibit 2 provides a further breakdown of Mercia’s funds, highlighting the investment criteria that apply to each asset class, the relative breadth of the portfolios and showing total liquidity across the group of c £284m.

Exhibit 3: Fund breakdown at September 2021

Source: Mercia Asset Management

Excluding the impact of performance fees (H122: £2.6m gross, £1.6m net, H121: nil), group revenues increased 21% in H122 to £10.1m (H121: £8.4m). In total, 96% of revenues came from fund management fees, with 88% of revenues contracted and recurring. Administrative expenses (excluding performance fees) increased by 9% to £8.0m (H121: £7.3m), despite headcount growth of c 17% to 106 people since the first lockdown in March 2020, meaning revenues more than covered central costs in the period. With further recruitment, administrative costs are expected to accelerate in H222.

PAT rose by 35% to £11.2m in H122 (H121: £8.2m), including the net performance fees, with EPS also increasing by 35% to 2.53p (H121: 1.87p). This strong performance left the group with cash and short-term liquidity investments of £52m (FY21: £55m), part of which we expect to be deployed towards M&A in 2022.

Tripled interim dividend, we estimate a c 2% FY22e dividend yield

Following the strong first-half performance, confidence in the sustainability of Mercia's hybrid investment model, together with the group’s good liquidity position, has enabled the board to declare a tripling of the interim dividend to 0.3p per share (H121: 0.1p). Assuming a more conservative uplift in the final dividend for FY22 than was seen in FY21, we estimate that Mercia might offer a prospective FY22 dividend yield of c 2% as part of a progressive dividend policy.

8% rise in hard NAV to £162m in H122

Net assets rose 6% during the period to £186.4m (FY21: £176.0m), with unrestricted cash and short-term liquidity investments of £52.1m (FY21: £54.7m) and total liquidity across the group of c £284m. Hard NAV (portfolio fair value plus net cash) rose by 8%% to £162.4m in H122 (36.9p per share) from £150.9m (34.3p per share) in FY21 and net assets per share rose by 6% to 42.4p (FY21: 40.0p) over the period.

Direct investment portfolio

The value of Mercia’s direct investment portfolio at H122 period-end rose to £110m, an increase of 15% over FY21 (£96m), with Mercia investing £5.4m (net) into five portfolio companies (Faradion, Medherant, Locate Bio, VirTrade and Eyoto) (H121: £10.9m net, 14 portfolio companies), together with net fair value gains during the period of £8.7m (H121: £6.7m).

Exhibit 4: A balanced portfolio with an identified shadow portfolio

Source: Mercia Asset Management

As can be seen in Exhibit 4, the group has a balanced portfolio spread across four sectors: life sciences, software, deep tech and digital entertainment. As well as 23 existing direct investments at period end, management has identified a further 12 companies in Mercia’s ‘shadow portfolio’ (following post period-end investments in Forensic Analytics and Pimberly) from the broader fund portfolio, that Mercia is tracking closely and may become future direct investments. Management anticipates a maximum portfolio size of c 30 investments.

We have interviewed the two games company CEOs in Mercia’s top 10 holdings, nDreams and Soccer Manager (Exhibits 5 and 6), to get more insight into their businesses, discussing the impact of lockdown and the metaverse to try to understand where these businesses might be headed next.

Exhibit 5: Patrick O’Luanaigh, nDreams

Exhibit 6: Andy Gore, Soccer Manager

Source: Edison Investment Research

Source: Edison Investment Research

Exhibit 5: Patrick O’Luanaigh, nDreams

Source: Edison Investment Research

Exhibit 6: Andy Gore, Soccer Manager

Source: Edison Investment Research

Top 10 direct holdings represent 81% of portfolio fair value

In line with previous reporting periods, Mercia’s top 20 direct investments represented 98% of total portfolio value at 30 September 2021, with the top 10 representing 81% of total portfolio value. Mercia weights its efforts accordingly.

Exhibit 7: Direct investment portfolio at 30 September 2021 (£’000s)

Holding

Year of first direct investment

Net value

1/4/21

Net cash invested H122

Fair value change

H122

Net value

30/9/21

% held at

31/3/21

Holding as % of total portfolio fair value

Cumulative % of total

1

nDreams

2014

17,726

-

-

17,726

35.4

16.1

16

2

Faradion

2017

5,693

1,500

5,756

12,949

15.0

11.7

28

3

Intechnica

2017

9,996

-

2,824

12,820

27.5

11.6

39

4

Medherant

2016

8,105

534

349

8,988

33.1

8.1

48

5

Voxpopme

2018

8,845

-

-

8,845

17.6

8.0

56

6

Impression Technologies

2015

8,622

-

-

8,622

67.3

7.8

63

7

Ton UK (Intelligent Positioning)

2015

4,913

-

-

4,913

29.9

4.5

68

8

Locate Bio

2018

3,006

1,664

188

4,858

18.1

4.4

72

9

Warwick Acoustics

2014

4,255

-

407

4,662

35.8

4.2

77

10

Soccer Manager

2015

3,553

-

1,047

4,600

39.0

4.2

81

11

VirtTrade

2015

2,812

796

148

3,756

40.0

3.4

84

12

Eyoto

2017

1,813

750

-

2,563

15.7

2.3

86

13

sureCore

2016

2,417

-

-

2,417

22.0

2.2

89

14

PsiOxus Therapeutics

2015

2,407

-

-

2,407

1.4

2.2

91

15

Edge Case Games

2015

2,300

-

-

2,300

18.7

2.1

93

16

W2 Global

2018

2,300

-

-

2,300

16.3

2.1

95

17

MyHealthChecked

2016

4,488

-

(2,448)

2,040

13.5

1.8

97

18

Sense Biodetection

2020

945

-

625

1,570

1.2

1.4

98

19

MIP Diagnostics

2020

302

-

-

302

3.3

0.3

98

20

LM Technologies

2015

250

-

(250)

-

48.3

-

98

Other direct investments

-

1,472

126

62

1,660

-

1.5

100

Total

-

96,220

5,370

8,708

110,298

 

100

100 

Source: Mercia Asset Management

Management reported commercial progress has continued to be made by the majority of the direct investment portfolio including each of the top five direct investments, with in-bound interest noted on the analyst call in each of the top three holdings. Eight direct holdings saw a fair value upgrade in H122, with one valuation reduced as its publicly traded share price fell, as well as full provision made for a smaller holding at period-end.

Of the top 10 portfolio companies within the direct investment portfolio, driven by significant commercial progress, Faradion (sodium-ion batteries) saw the largest rise in valuation (£5.8m), along with Intechnica (SaaS technical services, £2.8m); Soccer Manager (mobile football management game, £1.0m) also made progress. At the other end of the spectrum, the publicly traded share price of MyHealthChecked (COVID-19 travel tests, £2.4m write-down) has remained under pressure and LM Technologies was fully provisioned (a key enabler of the internet of things with its products assembled in China, £0.3m write-down).

The value of Mercia’s top 10 holdings increased by 19% over the six months since 31 March 2021. There were no exits from the direct portfolio during H122.

Outlook: Organic growth to be supported by M&A

Management has set out its strategic goals for 2022–24 in its Mercia 20:20 vision, including average annual growth in AUM of 20% over the period (closing AUM of £1.6bn by FY24) and average PBT of £20m per year, or total PBT of £60m over the three-year period.

Growth in AUM will be driven by returns from investment into new and existing direct holdings which are intended to contribute to the £60m of PBT targeted between FY22-24, as well as growth in FUM. Management intends to increase the size of its equity holdings, taking direct investment stakes of at least 10% in a diversified portfolio of up to 30 companies (versus 23 at 30 September 2021). The group also intends to grow FUM organically, including providing seed funding for the launch of new funds, as well as through M&A.

If Mercia can achieve these strategic objectives, we anticipate it would likely lead to further substantial share price gains over the next three years.

Increasing prospect for further M&A in 2022

Mercia has delivered a direct investment portfolio IRR of 14% from its IPO in 2014 to 30 September 2021, as well as annual growth in NAV per share of over 24% over the last two years, following completion of the acquisition of the Northern VCT fund management business.

Since their acquisition, the Northern VCT funds have raised £38m of new capital to 30 September 2021 (with a further £40m fund raise targeted), have delivered 13 exits and eight cross-referred investments, together with £6.1m of performance fees paid to Mercia (including £2.6m of gross performance fees received in H122).

With a cash-generative model and £52m of unrestricted net cash on the balance sheet as at 30 September 2021, management has indicated it will look to supplement organic growth with M&A around the group’s core and/or complementary competencies. Having demonstrated the success of the acquisition of the Northern VCT funds in 2019 (and Enterprise Ventures Group in 2016), we believe Mercia has the means and the rationale to target further M&A in 2022, without recourse to the markets.

Valuation: 0.87x NAV, 7.3x annualised P/E, c 2% yield

As a specialist fund manager, Mercia’s financial performance centres around the growth in fair value of its direct investment portfolio on its balance sheet, together with the growth in FUM and the predictable, recurring management fees that results. Mercia is unusual in that its fee income more than covers central costs, meaning it can point to a growing stream of both post-tax profits and dividends.

Sector valuations have fallen recently with renewed concerns over rising interest rates, high technology valuations and growing unease over the Omicron variant of COVID-19. However, in a more challenged investment scenario, Mercia’s model has identifiable downside protection, with its broad regional footprint offering an investment portfolio diversified both across asset class and sector, and a model that is both sustainably profitable and dividend generating.

Exhibit 8: Quoted peer group

Price

Currency

Market cap (£m)

Last NAV reported (£m)

Net cash/
(debt) (£m)

NAV per share (p)

NAV premium/
discount

Mercia Asset Management

37.0

GBp

163

186

52

42.4

0.87

 

Specialist asset managers

Gresham House

895.0

GBp

340

102

(2)

307.8

2.91

Intermediate Capital Group

2173.0

GBp

6,290

1,752

(1,097)

609.0

3.89

Mean

3.40

Direct investors

Augmentum Fintech

158.3

GBp

285

267

44

142

1.11

Forward Partners

108.5

GBp

146

102

37

104

1.04

HgCapital Trust

419.0

GBp

1,892

1,850

(101)

415

1.01

IP Group

118.0

GBp

1,231

1,439

249

135

0.87

Molten Ventures

926.0

GBp

1,417

1,357

156

887

1.04

Oakley Capital Investments

373.5

GBp

667

804

172

445

0.84

TMT Investments

7.05

USD

222

237

41

7.49

0.94

Mean

0.98

Median

1.01

Source: Company accounts, Refinitiv. Note: Priced at 13 December 2021.

Mercia trades on an H122 NAV of 0.87x, before considering the incremental value of the third-party funds business (we estimate an additional 7p per share at 4% of FUM), towards the bottom of our field of direct investment peers, which largely trade between 0.8x and 1.2x NAV. However, when we look at specialist asset managers such as Gresham House and Intermediate Capital Group, these trade at multiples of NAV as their valuation is increasingly referenced to earnings multiples. Mercia trades on a P/E of 7.3x annualised H122 EPS (vs average FY21/22 P/E multiples for Gresham House and ICG of 19x and 18x, respectively). After the trebling of its interim dividend, we estimate that Mercia might offer a prospective FY22 dividend yield of c 2%, assuming a more conservative uplift in the final dividend for FY22 than in FY21.

Given the strength of Mercia’s business, its structural profitability and underlying operating model, we believe Mercia remains undervalued at these levels.

Funds business: 7p per share uncaptured value on top of NAV

Thanks to the fees it charges on its third-party managed funds (c 2% of AUM), of which c 88% are contracted and recurring, Mercia is structurally profitable and dividend generating. An NAV-based valuation fails to capture the incremental value of this fund management business within Mercia, which represents an ever-widening gap as FUM increases.

We continue to estimate the value of Mercia’s embedded fee-earning funds business at 4% of FUM (a conservative valuation considering Mercia’s attractive fee margins) on top of the NAV-based valuation of its direct investment business. With last reported FUM of £762m, this implies a valuation for the funds business of c £30m, or 7p per share on top of the H122 NAV of 42.4p per share, implying a hybrid valuation of 49.4p per share.

Exhibit 9: 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

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 - basic normalised (p)

 

 

1.26

1.17

1.00

(4.55)

8.38

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

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

2,624

3,258

2,476

(15,758)

36,830

Depreciation and amortisation

76

81

84

212

212

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

Tax

0

0

0

0

0

Net operating cash flow

2,843

(442)

(5,080)

298

5,611

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)

(610)

30,520

Opening net debt/(cash)

(20,932)

(28,829)

(42,908)

(24,581)

(23,971)

Other non-cash movements

0

0

(629)

0

0

Closing net debt/(cash)

 

 

(28,829)

(42,908)

(24,581)

(23,971)

(54,491)

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

(59,601)

(49,435)

(29,769)

(30,186)

(54,725)

Source: Mercia Asset Management accounts.

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 £60,000 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. The research analyst primarily responsible for the preparation of this report personally holds an equity position in the company of less than 1%.

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 £60,000 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. The research analyst primarily responsible for the preparation of this report personally holds an equity position in the company of less than 1%.

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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