Mercia Asset Management — Another good exit: 4.2x ROI, 72% IRR

Mercia Asset Management (LN: MERC)

Last close As at 24/04/2024

23.75

0.00 (0.00%)

Market capitalisation

GBP106m

More on this equity

Research: TMT

Mercia Asset Management — Another good exit: 4.2x ROI, 72% IRR

Mercia Asset Management has completed the sale of its second largest holding, Faradion (a leading sodium-ion battery technology company), for £100m to Reliance New Energy Solar, a subsidiary of India’s Reliance Industries. Mercia will receive total cash proceeds of £19.4m from the sale, including initial unrestricted cash proceeds of £18.6m, plus a further £0.8m ringfenced for three months. The sale value represents an uplift of approximately 50% over Faradion’s conservative carrying value of £12.9m at 30 September 2021, an NAV uplift of c 1.5p per share. Based on the unrestricted cash proceeds, the sale delivers a 4.2x return on Mercia’s direct investment cost of £4.4m and an IRR of c 72%.

Analyst avatar placeholder

Written by

TMT

Mercia Asset Management

Another good exit: 4.2x ROI, 72% IRR

Portfolio exit

Investment companies

6 January 2022

Price

40.25p

Market cap

£177m

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

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.

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 Asset Management has completed the sale of its second largest holding, Faradion (a leading sodium-ion battery technology company), for £100m to Reliance New Energy Solar, a subsidiary of India’s Reliance Industries. Mercia will receive total cash proceeds of £19.4m from the sale, including initial unrestricted cash proceeds of £18.6m, plus a further £0.8m ringfenced for three months. The sale value represents an uplift of approximately 50% over Faradion’s conservative carrying value of £12.9m at 30 September 2021, an NAV uplift of c 1.5p per share. Based on the unrestricted cash proceeds, the sale delivers a 4.2x return on Mercia's direct investment cost of £4.4m and an IRR of c 72%.

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

1.25

09/20

24.9

101.6

722.0

149.9

34.1

1.18

03/21

54.7

96.2

764.0

176.0

40.0

1.01

09/21

52.1

110.3

762.0

186.4

42.4

0.95

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

As set out in our recent note, Sustainable model remains undervalued, at today’s closing price of 40.25p, Mercia’s shares trade at a c 5% discount to the group’s H122 NAV of 42.4p, before considering the incremental value of the third-party funds business (we estimate 7p per share at 4% of funds under management). Alternatively, as a profitable specialist asset manager, Mercia trades on a P/E of 8x annualised H122 earnings. After a tripling of the H122 interim dividend, we estimate the shares might offer a prospective FY22 yield of c 2%.

The group had net cash of £52m at 30 September 2021, which will be supplemented by the proceeds from the sale of Faradion.

With a proven model, we anticipate Mercia will make further progress in 2022, potentially including further M&A.

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 2022 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

More on Mercia Asset Management

View All

Latest from the TMT sector

View All TMT content

Research: Investment Companies

Georgia Capital — Sale of majority stake in the water utility business

On 31 December Georgia Capital (GCAP) announced it has agreed to sell an 80% stake in its water utility business (held through Georgia Global Utilities, GGU) to FCC Aqualia for a US$180m cash consideration. We estimate the deal values the business at a 13.4% uplift to its carrying value at end-September 2021 (on top of a c 13% uplift in Georgian Lari (GEL) terms that GCAP booked in Q321 vs Q221) and translates into a 2.2pp NAV accretion for GCAP (vs end-September 2021). GCAP will achieve a solid 2.7x multiple on invested capital (MOIC, of which 2.2x realised) and a 20.1% IRR in US dollar terms. GCAP will use US$95.4m of the proceeds to partially fund the redemption of GGU’s US$250m green bond (with the balance provided by FCC Aqualia). GCAP will retain full ownership of the renewable energy assets (now held through GGU).

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free