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Mercia Technologies |
Good progress across the portfolio |
H119 results |
Investment companies |
4 December 2018 |
Share price performance
Business description
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Analysts
Mercia Technologies is a research client of Edison Investment Research Limited |
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Mercia’s H119 results reflected continued steady progress across the portfolio, with net assets rising slightly to £125.2m and FuM remaining stable at £394.9m. The direct investment portfolio increased 17.7% to £77.8m, reflecting £9.2m of cash investment as well as £2.6m fair value uplift. Key portfolio companies continue to deliver against commercial milestones and with c £60m of investment expected in FY19, Mercia is well positioned for further progress in FY19. The shares continue to trade at a significant discount to NAV (0.74x) and peer group comparators.
Year end |
Net cash* (£m) |
Direct investments (£m) |
FuM |
NAV |
NAV per share (p) |
P/NAV |
03/16 |
30.9 |
38.1 |
220.0 |
80.0 |
26.3 |
1.16 |
03/17 |
59.6 |
52.0 |
336.5 |
121.4 |
40.0 |
0.76 |
03/18 |
49.4 |
66.1 |
400.0 |
123.5 |
40.7 |
0.75 |
H119 |
38.3 |
77.8 |
394.9 |
125.2 |
41.3 |
0.74 |
Note: *Includes liquid securities but not funds held on behalf of EIS investors.
17.7% growth in direct investment portfolio
Mercia reported H119 net assets of £125.2m, which compares to £123.5m at FY18. As a result of a £9.2m of investment and £2.6m fair value uplift, the direct investment portfolio grew to £77.8m from £66.0m at FY18. Within the Mercia Fund Managers (MFM) subsidiary, FuM remained steady at £394.9m (vs c £400m at FY18). Importantly, MFM also contributed the majority of £5.27m revenues at H119 (vs £4.85m in H118), with a 19.1% reduction in operating expenses to £0.69m vs the comparable period (£0.85m for H118). Mercia continues to expect to invest c £60m during FY19, of which £20-25m will be direct balance sheet investments.
Commercial traction in key companies
Within the £77.8m direct investment portfolio, four companies comprise 44% of the value, reporting significant commercial milestones during the period, including multi-million pound contracts for Oxford Genetics and nDreams. Warwick Acoustics received further funding from Mercia and Intechnica saw a 16.3% uplift in value. Also notable in the direct portfolio, Aston EyeTech signed a multi-million pound contract, while VirtTrade signed partnership agreements with both Formula 1 and Valiant Comics. Please see our October initiation for more information on the key portfolio businesses.
Valuation: 0.74x NAV, does not include MFM
Mercia’s shares trade at a meaningful discount to NAV (0.74x). This compares to its peers such as IP Group at 0.83x and Draper Esprit at 1.19x. We note that the simple NAV calculation does not include profits generated from the MFM business, which we estimate at a value of c 9p per share, which is unchanged from the initiation (bringing the total discount to NAV to 0.60x). Catalysts for a re-rating would include meaningful commercialisation of the direct investments and/or further successful exits.
Investment summary
Stable net assets and FuM
Mercia reported a net asset value of £125.2m at H119 (vs £123.5m at FY18), which equates to 41.3p per share. Largely as a result of a £9.2m direct investment, unrestricted cash and short-term liquidity investments fell from £49.4m at FY18 to £38.3m at H119. This is in line with expectations and management anticipates total direct investment of £20-25m for FY19.
The MFM subsidiary business reported FuM of £394.9m, which is in line with c £400m at FY18. The funds have £216m available capital to invest and MFM is currently investing c £25m pa from its venture funds. The aim is to create a healthy pipeline of investments, before making selective new direct balance sheet investments – so-called, ‘Emerging Stars’.
Group revenues increased by 8.7% to £5.3m and included £3.6m fund management fees, £0.5m initial management fees and £1.1m portfolio director fees. Accounting for the increased fee income, net expenses reduced to £0.7m (£0.9m at H118). The contribution from the MFM business is a key differentiator for Mercia, as central costs are minimised and balance sheet cash is largely directed towards growing the direct investment portfolio.
Direct investment portfolio up 17.7% vs prior year.
Mercia’s direct investment portfolio grew from £66.0m at FY18 to £77.8m at H119, with the value increasing due to £9.2m of investment, as well as a £2.6m net fair value increase.
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£3.2m fair value gains resulted from uplifts for Faradion and Intechnica, based upon “third-party indications of market value”, an uplift at Voxpopme following a successful syndicated third-party investment round and an uplift at The Native Antigen Company as its profitable trading progresses.
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£0.6m downward fair value movement: This reflects a £0.5m reduction in Concepta’s share price, as well as a £0.1m reduction in a small direct investment, where Mercia elected not to provide further funding. In total, 10% of the portfolio has been subject to impairments.
■
Edge Case Games sold post period end: following a disappointing relaunch of its title Fractured Space during the summer, Edge Case Games was sold in an asset and royalty deal to Wargaming. Over £1.0m was returned to Mercia up-front, with deferred consideration of up to $10m possible over time.
■
Two new Emerging Stars brought across from MFM: Mercia has invested £0.5m into Locate Bio (regenerative medicine) and £2.0m into W2 Global Data Solutions (W2 was post period end).
Similar to previous reporting periods, Mercia’s top 20 direct investments represented 98.7% of total portfolio value (includes Edge Case Games, excludes W2 Global Data Solutions and Locate Bio).
Milestones achieved
Significant commercial milestones achieved by direct investment portfolio companies include:
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Oxford Genetics won its largest multi-million pound contract to date with a global e-commerce provider of reagents and tools to the research and clinical community.
■
nDreams won its largest multi-million pound contract to date with a high-profile global technology company.
■
Aston EyeTech (trading as Eyoto) won its largest multi-million pound contract to date with one of the fastest growing optical retailers in the world.
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VirtTrade signed partnership agreements with both Formula 1 and Valiant Comics to develop digital collectibles content.
Please see our note, Realising value for more information on the key portfolio businesses.
Exhibit 1: Direct investment portfolio
(£'000) |
Sector |
Net value 1/4/18 |
Net cash invested in H119 |
Fair value change H119 |
Net value 30/9/18 |
% held at 30/9/18 |
nDreams Ltd |
Digital/digital entertainment |
12,979 |
- |
- |
12,979 |
45.6 |
Oxford Genetics Ltd |
Life sciences/biosciences |
9,090 |
- |
- |
9,090 |
40.5 |
Warwick Acoustics Ltd |
EMME |
6,152 |
1,000 |
- |
7,152 |
64 |
Intechnica Ltd |
Software and the internet |
4,021 |
- |
656 |
4,677 |
27.9 |
Impression Technologies Ltd |
EMME |
3,107 |
1,500 |
- |
4,607 |
31.4 |
Ton UK Ltd t/a Intelligent Positioning |
Software and the internet |
4,216 |
- |
- |
4,216 |
28.8 |
Faradion Ltd |
EMME |
1,299 |
600 |
1,625 |
3,524 |
18.1 |
Medherant Ltd |
Life sciences/biosciences |
3,453 |
- |
- |
3,453 |
31.9 |
Smart Antenna Technologies Ltd |
EMME |
2,148 |
1,200 |
- |
3,348 |
32.2 |
Edge Case Games Ltd |
Digital/digital entertainment |
2,000 |
1,150 |
- |
3,150 |
21.2 |
VirtTrade Ltd |
Digital/digital entertainment |
2,538 |
550 |
- |
3,088 |
28.4 |
Voxpopme Ltd |
Software and the internet |
1,000 |
1,500 |
526 |
3,026 |
21.8 |
PsiOxus Therapeutics Ltd |
Life Sciences/biosciences |
2,377 |
- |
- |
2,377 |
1.5 |
The Native Antigen Company Ltd |
Life sciences/biosciences |
1,942 |
- |
382 |
2,324 |
32.7 |
LM Technologies Ltd |
EMME |
1,913 |
- |
- |
1,913 |
41.4 |
sureCore Ltd |
EMME |
1,500 |
334 |
- |
1,834 |
24.4 |
Aston EyeTech Ltd t/a Eyoto |
Life sciences/biosciences |
1,750 |
- |
- |
1,750 |
18.7 |
Crowd Reactive Ltd |
Software and the internet |
1,650 |
(13) |
- |
1,637 |
26.2 |
Soccer Manager Ltd |
Digital/digital entertainment |
1,199 |
300 |
- |
1,499 |
31.6 |
Concepta Plc |
Life sciences/biosciences |
1,306 |
365 |
-468 |
1,203 |
18.2 |
Other direct investments |
- |
430 |
670 |
-120 |
980 |
n/a |
Total |
|
66,070 |
9,156 |
2,601 |
77,827 |
n/a |
Source: Mercia Technologies: Note. EMME is Electronics, Materials, Manufacturing and Engineering
Exhibit 2: Financial summary
£'000 |
2014 |
2015 |
2016 |
2017 |
2018 |
||
31-March |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
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INCOME STATEMENT |
|||||||
Revenue |
|
|
723 |
508 |
1,755 |
6,660 |
10,197 |
Cost of Sales |
(26) |
(10) |
(79) |
(92) |
0 |
||
Gross Profit |
697 |
498 |
1,676 |
6,568 |
10,197 |
||
Operating Profit (before amort. and except.) |
|
42 |
2,937 |
(1,439) |
2,624 |
3,258 |
|
Amortisation of acquired intangibles |
0 |
0 |
(17) |
(301) |
(301) |
||
Fair value changes |
0 |
3,934 |
896 |
4,268 |
2,823 |
||
Realised gains |
0 |
0 |
839 |
871 |
|||
Exceptionals |
0 |
(1,018) |
(372) |
(1,125) |
(1,125) |
||
Share-based payments |
0 |
(44) |
(230) |
(395) |
(497) |
||
Reported operating profit |
42 |
1,875 |
(2,058) |
803 |
1,335 |
||
Net Interest |
0 |
93 |
361 |
186 |
274 |
||
Joint ventures & associates (post tax) |
0 |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
42 |
3,030 |
(1,078) |
2,810 |
3,532 |
Profit Before Tax (reported) |
|
|
42 |
1,968 |
(1,697) |
989 |
1,609 |
Reported tax |
0 |
0 |
0 |
54 |
54 |
||
Profit After Tax (norm) |
42 |
3,030 |
(1,078) |
2,810 |
3,532 |
||
Profit After Tax (reported) |
42 |
1,968 |
(1,697) |
1,043 |
1,663 |
||
Minority interests |
0 |
0 |
0 |
0 |
0 |
||
Discontinued operations |
0 |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
42 |
3,030 |
(1,078) |
2,810 |
3,532 |
||
Net income (reported) |
42 |
1,968 |
(1,697) |
1,043 |
1,663 |
||
Average Number of Shares Outstanding (m) |
13 |
212 |
212 |
224 |
301 |
||
EPS - normalised (p) |
|
|
0.33 |
1.43 |
(0.51) |
1.26 |
1.17 |
EPS - diluted normalised (p) |
|
|
0.33 |
1.43 |
(0.51) |
1.26 |
1.17 |
EPS - basic reported (p) |
|
|
0.33 |
0.93 |
(0.80) |
0.47 |
0.55 |
Dividend (p) |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
N/A |
(-29.7) |
245.5 |
279.5 |
53.1 |
||
Gross Margin (%) |
96.4 |
98.0 |
95.5 |
98.6 |
100.0 |
||
Normalised Operating Margin |
5.8 |
578.1 |
-82.0 |
39.4 |
32.0 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
27 |
27,121 |
50,103 |
63,693 |
77,428 |
Intangible Assets |
0 |
2,455 |
11,815 |
11,514 |
11,213 |
||
Tangible Assets |
27 |
49 |
145 |
151 |
145 |
||
Investments & other |
0 |
24,617 |
38,143 |
52,028 |
66,070 |
||
Current Assets |
|
|
223 |
54,349 |
31,730 |
64,576 |
53,965 |
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
184 |
716 |
798 |
747 |
1,057 |
||
Cash & cash equivalents |
39 |
23,633 |
20,932 |
28,829 |
42,908 |
||
Short term liquidity investments |
0 |
30,000 |
10,000 |
35,000 |
10,000 |
||
Current Liabilities |
|
|
(141) |
(631) |
(1,521) |
(6,698) |
(7,760) |
Creditors |
(141) |
(631) |
(1,521) |
(6,698) |
(7,760) |
||
Tax and social security |
0 |
0 |
0 |
0 |
0 |
||
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
0 |
0 |
(271) |
(217) |
(163) |
Long term borrowings |
0 |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
0 |
0 |
(271) |
(217) |
(163) |
||
Net Assets |
|
|
108 |
80,839 |
80,041 |
121,354 |
123,470 |
Minority interests |
(0) |
0 |
0 |
0 |
0 |
||
Shareholders' equity |
|
|
108 |
80,839 |
80,041 |
121,354 |
123,470 |
CASH FLOW |
|||||||
Op Cash Flow before WC and tax |
46 |
2,943 |
(1,406) |
2,700 |
3,339 |
||
Working capital |
(28) |
(20) |
650 |
5,250 |
(87) |
||
Exceptional & other |
0 |
(4,952) |
(1,268) |
(5,107) |
(3,694) |
||
Tax |
0 |
0 |
0 |
0 |
0 |
||
Net operating cash flow |
|
|
18 |
(2,029) |
(2,024) |
2,843 |
(442) |
Capex |
(30) |
(27) |
(113) |
(82) |
(75) |
||
Acquisitions/disposals |
0 |
(11,563) |
(20,939) |
(8,779) |
(10,664) |
||
Net interest |
0 |
22 |
397 |
165 |
260 |
||
Equity financing |
(4) |
67,230 |
(22) |
38,750 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
(30,000) |
20,000 |
(25,000) |
25,000 |
||
Net Cash Flow |
(16) |
23,633 |
(2,701) |
7,897 |
14,079 |
||
Opening net debt/(cash) |
|
|
(54) |
(39) |
(23,633) |
(20,932) |
(28,829) |
FX |
0 |
0 |
0 |
0 |
0 |
||
Other non-cash movements |
0 |
(39) |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(39) |
(23,633) |
(20,932) |
(28,829) |
(42,908) |
Closing net debt/ (cash) inc short-term liquidity investments (not EIS) |
(39) |
(53,633) |
(30,932) |
(59,601) |
(49,435) |
||
Source: Mercia Technologies |
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