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The hybrid model - halfway home

Mercia Asset Management 3 December 2020 Update
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Mercia Asset Management

The hybrid model – halfway home

H121 results

Investment companies

3 December 2020

Price

27.35p

Market cap

£120m

Net cash (£m) at 30 September 2020

24.9

Shares in issue

440.1m

Free float

69.1%

Code

MERC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

42.5

45.9

(14.5)

Rel (local)

24.2

33.0

(5.5)

52-week high/low

28.3p

13.8p

Business description

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

Next event

FY21 results

July 2021

Analysts

Richard Williamson

+44 (0)20 3077 5700

Rob Murphy

+44 (0)20 3077 5700

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

Mercia has demonstrated real progress on its three-year strategic plan to achieve operating profitability, expand AUM to £1bn and ‘evergreen’ the balance sheet by end FY22. AUM have increased to £872m, with third-party, fee-earning FUM of £722m. The group delivered an operating profit of £8.0m (H120: £2.1m), an adjusted operating profit (ex-realisations, fair value gains, etc) of £1.1m (H120: £0.6m loss) and H121 EPS of 1.87p (H120: 0.69p). Revenues are sustainable, with 87% recurring, allowing Mercia to initiate a progressive dividend policy, with a maiden interim dividend of 0.1p per share. Despite progress, Mercia’s shares continue to trade at a material 20% discount to NAV (0.80x), before considering the incremental value of the third-party funds business (we estimate at 3% of FUM, or 4.9p).

Period end

Net cash*
(£m)

Direct
investments (£m)

FUM
(£m)

NAV
(£m)

NAV per share (p)

P/NAV
(x)

03/18

49.4

66.1

400.0

123.5

40.7

0.67

03/19

29.8

87.7

381.0

126.1

41.6

0.66

03/20

30.2

87.5

658.0

141.5

32.1

0.85

09/20

24.9

101.6

722.0

149.9

34.1

0.80

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

Direct investment portfolio: 6% H121 NAV growth

H121 reported net assets were £149.9m (FY20: £141.5m), with unrestricted cash and liquid securities of £24.9m (FY20: £30.2m). Net assets per share grew by 6% over the period from 32.1p to 34.1p. Mercia invested £10.9m (net) into 14 portfolio companies, helping the direct investment portfolio fair value rise 16.2% to £101.6m (FY20: £87.5m). The company also delivered a profitable exit during the period (The Native Antigen Company: £1.7m gain, 8x return, 65% IRR) and another post period end (Clear Review: £1.0m in cash, 2x return, 72% IRR).

Fund management: Scaling the hybrid model

AUM have increased to £872m up 78% from H119, with third-party, fee-earning FUM of £722m, a rise of 100% y-o-y. The group delivered a 51% increase in revenue to £8.4m (H120: £5.5m), of which 87% is annual recurring revenue from fund management and monitoring fees. Adjusted operating profit (ex-realisations, fair value gains, etc) was £1.1m (H120: £0.6m loss), with H121 EPS of 1.87p (H120: 0.69p). A profitable business, with £2.0m of operating cash flow in H121, has allowed management to initiate a progressive dividend policy, with a maiden interim dividend of 0.1p per share. We value Mercia Fund Managers (MFM) at a percentage of FUM today, but should shortly be able to value it on a multiple of earnings.

Valuation: 0.80x NAV + £22m/4.9p for MFM

Mercia is increasingly ticking the boxes – operating profitably, scaling AUM, with a sustainable dividend policy and building towards a mature, evergreen balance sheet. Despite demonstrable progress, Mercia’s shares trade at 0.80x NAV, even before considering the incremental value of MFM, which we estimate to be worth an additional 4.9p/share (from 4.5p/share) on top of NAV. Catalysts for a re-rating include further scaling of the business, revenue/earnings growth, commercialisation of the direct investment portfolio and/or successful exits.

H121 results review

Reaping the benefits of increasing scale

Mercia reported a 9% rise in assets under management (AUM) to £872m in H121 (FY20: £798m), highlighting the group’s resilience as performance has improved across the breadth of the group’s funds from the start of the COVID-19 pandemic. Third-party funds under management (FUM) rose by 10% to £722m in H121 (FY20: £658m). Growth of AUM and FUM over the last 12 months has been 78% and 100%, respectively, reflecting the contribution from the acquisition of the Northern VCT fund management business.

Exhibit 1: H121 AUM breakdown

Exhibit 2: H121 FUM breakdown

Source: Mercia

Source: Mercia

Exhibit 1: H121 AUM breakdown

Source: Mercia

Exhibit 2: H121 FUM breakdown

Source: Mercia

With a proportion of Mercia’s revenues directly linked to asset prices, at the start of the lockdown in March 2020, management had anticipated some contraction of its revenue base. However, the group has subsequently performed better than management had expected. Mercia’s performance has been achieved without any government-backed financial support, furloughing or redundancies.

Group revenues increased by 51% y-o-y to £8.4m (H120: £5.5m), reflecting a full six-month contribution from the Northern VCT fund management business acquired in December 2019, of which 87% is annual recurring revenue from fund management and monitoring fees. Revenues comprised £6.2m from fund management fees, £0.7m from initial management fees and £1.4m from portfolio director fees, as well as £0.1m in other consultancy revenues. Despite the large increase in revenues, staff and administrative expenses increased by a lower 16.5% to £7.3m (H120: £6.3m), despite an increase in headcount from 93 staff at FY20 to 100. Cost growth was restrained as the pandemic slowed recruitment and through savings in travel-related costs.

Adjusted operating profit (ex-realisations, fair value gains, etc) was £1.1m (H120: £0.6m loss). Together with the sale of The Native Antigen Company (NAC: £1.7m realised gain, H120: zero) and net fair value gains (£6.7m, H120: £3.2m), this led to PAT of £8.2m (H120: £2.1m) and EPS of 1.87p (H120: 0.69p).

Implementation of a progressive dividend policy

As a profitable business, with £2.0m of operating cash flow in H121, management has felt able to implement a progressive dividend policy, with a maiden interim dividend of 0.1p per share.

NAV: 6% rise to £149.9m over the six-month period

H121 reported net assets were £149.9m (FY20: £141.5m), with unrestricted cash of £24.9m (FY20: £30.2m) and NAV per share growing by 6% over the period to 34.1p from 32.1p. Hard NAV (portfolio fair value plus net cash) rose by 7.5% to £126.5m for H121 (28.7p per share) from £117.7m (26.7p per share) for FY20.

Portfolio review: Stronger outturn than anticipated

The value of Mercia’s direct investment portfolio at period-end rose to £101.6m, an increase of 16.2% over FY20 (£87.5m), with Mercia investing £10.9m (net) into 14 portfolio companies, together with net fair value gains during the period of £6.7m (H120: zero). Mercia delivered a profitable exit during the period (NAC: £1.7m gain, 8x return, 65% IRR) and another post period end (Clear Review: £1.0m in cash, 2x return, 72% IRR).

This performance highlights the resilience of Mercia’s business, with long-term contracted fund management fees, diversified portfolios and good liquidity across the group. Investors have also favoured sectors seen to benefit from lockdown where Mercia is active, such as software, digital entertainment, medtech, digital healthcare, diagnostics and biotech.

15 of Mercia’s top 20 holdings are funded through FY21 and beyond

In line with previous reporting periods, Mercia’s top 20 direct investments represented 98.6% of total portfolio value at 30 September 2020, with the top 10 representing over 80% of total portfolio value. Mercia weights its efforts accordingly.

Exhibit 3: Direct Investment Portfolio (£000s)

Holding

Net value
1/4/20

Net cash invested H121

Realisations

Fair value change
H121

Net value
30/9/20

% held at
30/9/20

Holding as % of total portfolio

Cumulative % of total portfolio

1

nDreams

16,120

1,000

-

606

17,726

36.4

17%

17%

2

Oxford Genetics (OXGENE)

11,743

1,000

-

3,351

16,094

30.2

16%

33%

3

Intechnica

7,177

1,250

-

1,568

9,995

27.5

10%

43%

4

Medherant

6,705

1,400

-

-

8,105

30.1

8%

51%

5

Voxpopme

6,030

-

-

1,012

7,042

17.1

7%

58%

6

Impression Technologies

4,294

1,750

-

-

6,044

25.9

6%

64%

7

Ton UK (Intelligent Positioning)

4,354

750

-

(203)

4,901

29.9

5%

69%

8

Faradion

4,025

500

-

(2)

4,523

15.6

4%

73%

9

Warwick Acoustics

3,656

500

-

-

4,156

48.3

4%

77%

10

Locate Bio

2,250

750

-

6

3,006

16.7

3%

80%

11

VirtTrade (Avid Games)

2,200

615

-

(3)

2,812

20.3

3%

83%

12

Soccer Manager

2,534

-

-

-

2,534

34.8

2%

86%

13

Edge Case Games

2,300

-

-

-

2,300

21.2

2%

88%

14

W2 Global Data Solutions

2,000

300

-

-

2,300

16.3

2%

90%

15

Eyoto Group

1,752

500

-

-

2,252

15.7

2%

92%

16

PsiOxusTherapeutics

2,193

-

-

(4)

2,189

1.4

2%

94%

17

sureCore

2,167

-

-

-

2,167

22.0

2%

97%

18

Clear Review*

500

-

-

530

1,030

4.0

1%

98%

19

Concepta

475

200

-

-

675

14.6

1%

98%

20

MIP Diagnostics

-

300

-

2

302

3.3

0%

99%

The Native Antigen Company**

3,493

-

(3,493)

-

-

-

-

99%

Other direct investments

1,503

95

-

(133)

1,465

N/A

1%

100%

Total

87,471

10,910

(3,493)

6,730

101,618

 

100%

 

Source: Mercia. Note: *Exited after period end. **Exited during H121.

Of the top 10 portfolio companies within the direct investment portfolio, nDreams (VR game developer) had a small rise in valuation (£0.6m) following the release of its VR game Phantom: Covert Ops; OXGENE (gene therapy) rose 29% (£3.4m), driven by continuing strong revenue growth, the launch of a new product and a funding round; Intechnica (SaaS technical services, £1.6m) and Voxpopme (video analytics, £1m) both saw strong revenue growth; and Intelligent Positioning (SEO platform) was the only business in the direct investment portfolio to experience a setback in valuation of c 5% (a drop of £0.2m) due to high churn, which has since stabilised.

The valuations of the other five businesses in the top 10 holdings were largely unchanged, although Warwick Acoustics completed a syndicated funding round shortly after period end (see below) and, as has been discussed previously, Mercia achieved profitable exits from NAC (£1.7m gain) during H121 and Clear Review (£0.5m gain, see below) post period end.

The value of Mercia’s top 10 holdings has risen by 23% over the six months since 31 March 2020, by 6% over the 12 months since 30 September 2019 and by 51% since 31 March 2019.

Exhibit 4: Valuation methodology applied across Mercia’s direct portfolio

Source: Mercia

Post year-end developments include:

Warwick Acoustics, 7 October 2020: Warwick Acoustics secured £2.1m of syndicated investment, including £0.5m from Mercia. The company has also secured a £0.4m grant from Innovate UK, in conjunction with the University of Warwick. Warwick Acoustics is one of Mercia's earliest investments, becoming a direct investment in December 2014. It develops highly innovative audio products for both the automotive audio market and the personal and studio headphone market. The funding is sufficient to support expansion plans for at least the next 15 months.

Clear Review, 19 October 2020: sale of Clear Review for a total cash consideration of up to £26.0m. Mercia held a 4.0% fully diluted holding in the company and will receive cash proceeds of £1.0m, a 2x return on its investment and a 72% IRR. Clear Review is a SaaS tool providing organisations with data and systems to improve performance management. It was sold to Advanced Business Software and Solutions, a software and services company.

Sense Biodetection, 30 October 2020: Mercia made a £0.9m new direct investment in Sense Biodetection as part of a US$50m syndicated funding round, with investors including KDT Sense Holdings, Cambridge Innovation Capital and Earlybird Health and private investors including Abcam founder, Jonathan Milner. Sense is focused on the development of rapid, instrument-free, point-of-care molecular diagnostics testing for a range of bacterial and viral infections. In March 2020, Sense announced an accelerated programme to launch a diagnostic test for COVID-19. Following its investment, Mercia holds a 1.2% fully diluted stake in Sense, with its third-party managed funds holding 9.1%.

Strategy: Scaling, sustainable and evergreen

Specialist asset manager

Mercia is a specialist asset manager with a stated intent of becoming the leading regional provider of supportive balance sheet, venture, private equity and debt capital in transaction sizes typically below £10m. Given its financial resources, Mercia targets businesses with relatively modest capital needs, typically up to c £20m in total across multiple rounds.

Management’s three-year strategic plan is to achieve adjusted operating profitability, increase assets under management to at least £1bn and to ‘evergreen’ the group’s balance sheet. In its H121 results presentation, Mercia stated its strategic goals for the next 18 months as follows:

Continued growth in adjusted operating profit: Mercia delivered adjusted operating profit (before fair value adjustments, realisation gains, amortisation and share-based payment charges) of £1.1m, with 87% of revenues recurring. This sustainable revenue stream should scale with FUM and in H121 already covers the group’s central costs.

Grow AUM to £1bn+: the AUM target delivers the scale that management believes is necessary to deliver a fully sustainable, evergreen business model. With AUM of £872m at 30 September 2020, this implies an annual growth rate of >9.6% to achieve this target by FY22.

Evergreen’ the balance sheet: an evergreen model is one where annual portfolio realisations are greater than net investment, with management fees covering other operational costs. With a maturing investment portfolio, management believes it has sufficient capital with cash and liquid assets of £24.9m at 30 September 2020, together with organic growth and anticipated portfolio realisations, to achieve the goal of an evergreen balance sheet by FY22 without the need for further recourse to the markets.

Follow a progressive dividend policy: management has declared a 0.1p maiden interim dividend, but has yet to clarify the structure of its progressive dividend policy.

Become the number one provider of capital in its target markets: to become the ‘go-to’ source of capital, management is looking to build a share of 20%+ in its targeted regional markets (in England: the North, North-East, North-West, Midlands, and Scotland). Management estimates that the group currently has a share of c 18% of these markets.

Valuation: Hybrid model undervalued at 0.80x NAV

To fund the acquisition of the Northern VCT fund management busines, Mercia completed a share placing at 25p in December 2019. Since then, Mercia has traded at a widened discount to its NAV, due in part to the NAV/share erosion that the deal entailed, exacerbated by uncertainties around the COVID-19 pandemic. However, following its H121 results, having demonstrated the value of the Northern VCT fund management business within the group (43% of FUM, £6m+ recurring revenues), the shares have risen above the placing price and, with the business now trading profitably on a sustainable basis, investors could further reassess the group’s future prospects.

Currently, Mercia trades at a 20% discount to the H121 NAV (34.1p), while a number of its immediate peers trade at a premium to NAV, reflecting consistent, strong NAV growth and the latent value of their portfolio. Given the strength of Mercia’s business, its structural profitability, the performance of its portfolio and its underlying operating model, we believe Mercia remains undervalued at these levels.

Funds business: An additional c £22m/5pps on top of NAV

Thanks to the fees it charges on its third-party managed funds (c 2% of AUM), of which c 87% are recurring, Mercia is now structurally profitable, with management targeting an evergreen funding model by FY22. As FUM continues to grow as a proportion of the business, generating incrementally larger revenues for the group, this underlines why a NAV-based valuation does not reflect the incremental value of the fund management business within Mercia.

We continue to estimate the value of Mercia’s embedded fee-earning funds business at 3% of FUM (a conservative valuation considering Mercia’s fee margins) on top of the NAV-based valuation of its direct investment business. With last reported FUM of £722m, this implies a valuation for the funds business of c £22m (vs c £20m before), or 4.9p per share (4.5p per share), on top of the H121 NAV of 34.1p per share.

Exhibit 5: Financial summary

£'000

2015

2016

2017

2018

2019

2020

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

508

1,755

6,660

10,197

10,675

12,747

Cost of Sales

(10)

(79)

(92)

0

0

0

Gross Profit

498

1,676

6,568

10,197

10,675

12,747

Operating costs

(1,495)

(4,011)

(9,051)

(10,633)

(12,115)

(12,661)

Fair value changes

3,934

896

4,268

2,823

3,916

(15,844)

Realised gains

0

0

839

871

0

0

Normalised operating profit

 

 

2,937

(1,439)

2,624

3,258

2,476

(15,758)

Amortisation of acquired intangibles

0

(17)

(301)

(301)

(301)

(852)

Exceptionals

(1,018)

(372)

(1,125)

(1,125)

0

(695)

Share-based payments

(44)

(230)

(395)

(497)

(171)

(528)

Reported operating profit

1,875

(2,058)

803

1,335

2,004

(17,833)

Net Interest

93

361

186

274

562

220

Joint ventures & associates (post tax)

0

0

0

0

0

0

Profit Before Tax (norm)

 

 

3,030

(1,078)

2,810

3,532

3,038

(15,538)

Profit Before Tax (reported)

 

 

1,968

(1,697)

989

1,609

2,566

(17,613)

Reported tax

0

0

54

54

54

159

Profit After Tax (norm)

3,030

(1,078)

2,810

3,532

3,038

(15,538)

Profit After Tax (reported)

1,968

(1,697)

1,043

1,663

2,620

(17,454)

Minority interests

0

0

0

0

0

0

Discontinued operations

0

0

0

0

0

0

Net income (normalised)

3,030

(1,078)

2,810

3,532

3,038

(15,538)

Net income (reported)

1,968

(1,697)

1,043

1,663

2,620

(17,454)

Basic average number of shares outstanding (m)

212

212

224

302

303

341

EPS – basic normalised (p)

 

 

1.43

(0.51)

1.26

1.17

1.00

(4.55)

EPS – diluted normalised (p)

 

 

1.43

(0.51)

1.21

1.13

1.00

(4.55)

EPS – basic reported (p)

 

 

0.93

(0.80)

0.47

0.55

0.86

(5.11)

Dividend (p)

0.00

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

(29.7)

245.5

279.5

53.1

4.7

19.4

Gross Margin (%)

98.0

95.5

98.6

100.0

100.0

100.0

Normalised Operating Margin

578.1

-82.0

39.4

32.0

23.2

-123.6

BALANCE SHEET

Fixed Assets

 

 

27,121

50,103

63,693

77,428

98,724

124,899

Intangible Assets

2,455

11,815

11,514

11,213

10,912

36,705

Tangible Assets

49

145

151

145

153

125

Right of use assets

0

0

0

0

0

598

Investments & other

24,617

38,143

52,028

66,070

87,659

87,471

Current Assets

 

 

54,349

31,730

64,576

53,965

31,180

31,951

Stocks

0

0

0

0

0

0

Debtors

716

798

747

1,057

782

1,298

Cash & cash equivalents

23,633

20,932

28,829

42,908

25,210

24,438

Short term liquidity investments

30,000

10,000

35,000

10,000

5,188

6,215

Current Liabilities

 

 

(631)

(1,521)

(6,698)

(7,760)

(3,730)

(6,659)

Creditors

(631)

(1,521)

(6,698)

(7,760)

(3,730)

(4,805)

Tax and social security

0

0

0

0

0

0

Lease liabilities

0

0

0

0

0

(118)

Short term borrowings

0

0

0

0

0

0

Other (incl deferred consideration)

0

0

0

0

0

(1,736)

Long Term Liabilities

 

 

0

(271)

(217)

(163)

(109)

(8,731)

Long term borrowings

0

0

0

0

0

0

Lease liabilities

0

0

0

0

0

(473)

Other long-term liabilities

0

(271)

(217)

(163)

(109)

(8,258)

Net Assets

 

 

80,839

80,041

121,354

123,470

126,065

141,460

Minority interests

0

0

0

0

0

0

Shareholders' equity

 

 

80,839

80,041

121,354

123,470

126,065

141,460

CASH FLOW

Op Cash Flow before WC and tax

2,943

(1,406)

2,700

3,339

2,560

(15,685)

Working capital

(20)

650

5,250

(87)

(3,724)

533

Exceptional & other

(4,952)

(1,268)

(5,107)

(3,694)

(3,916)

15,149

Depreciation of right-of-use assets

0

0

0

0

0

139

Tax

0

0

0

0

0

0

Net operating cash flow

 

 

(2,029)

(2,024)

2,843

(442)

(5,080)

136

Capex

(27)

(113)

(82)

(75)

(92)

(45)

Acquisitions/disposals

(11,563)

(20,939)

(8,779)

(10,664)

(17,673)

(28,056)

Net interest

22

397

165

260

531

245

Equity financing

67,230

(22)

38,750

0

(196)

30,000

Dividends

0

0

0

0

0

0

Other

(30,000)

20,000

(25,000)

25,000

4,812

(3,052)

Net Cash Flow

23,633

(2,701)

7,897

14,079

(17,698)

(772)

Opening net debt/(cash)

 

 

(39)

(23,633)

(20,932)

(28,829)

(42,908)

(25,210)

FX

0

0

0

0

0

0

Other non-cash movements

(39)

0

0

0

0

0

Closing net debt/(cash)

 

 

(23,633)

(20,932)

(28,829)

(42,908)

(25,210)

(24,438)

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

(53,633)

(30,932)

(59,601)

(49,435)

(29,769)

(30,186)

Source: Mercia Asset Management accounts

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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 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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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 2020 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

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

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

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 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 2020 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

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

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

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