Last close As at 06/08/2026
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Research: TMT
Mercia’s FY19 results reflect continued progress across the portfolio, with the company in good shape for further growth. Net assets rose 2% to £126.1m, but FUM fell 5% to £381m due to the winding up of the successful RisingStars Growth Fund (15% IRR, TVPI of 528%). The direct investment portfolio increased to £87.7m, with £19.4m of cash invested in 17 companies, as well as £3.9m of fair value uplift. Mercia remains well positioned for further progress in FY20 with key portfolio companies strategically well placed, together with firepower from the group’s £168m of free cash and £30m of unrestricted balance sheet cash. The shares continue to trade at a significant discount to NAV (0.77x), even before considering the embedded value of Mercia Fund Managers (10p+).
Written by
Mercia Asset Management |
Scaling regional powerhouse |
FY19 results |
Investment companies |
8 July 2019 |
Share price performance
Business description
Next event
Analysts
Mercia Asset Management is a research client of Edison Investment Research Limited |
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Mercia’s FY19 results reflect continued progress across the portfolio, with the company in good shape for further growth. Net assets rose 2% to £126.1m, but FUM fell 5% to £381m due to the winding up of the successful RisingStars Growth Fund (15% IRR, TVPI of 528%). The direct investment portfolio increased to £87.7m, with £19.4m of cash invested in 17 companies, as well as £3.9m of fair value uplift. Mercia remains well positioned for further progress in FY20 with key portfolio companies strategically well placed, together with firepower from the group’s £168m of free cash and £30m of unrestricted balance sheet cash. The shares continue to trade at a significant discount to NAV (0.77x), even before considering the embedded value of Mercia Fund Managers (10p+).
Period end |
Net cash* (£m) |
Direct |
FUM |
NAV |
NAV per share (p) |
P/NAV |
03/16 |
30.9 |
38.1 |
220.0 |
80.0 |
26.4 |
1.20 |
03/17 |
59.6 |
52.0 |
336.5 |
121.4 |
40.0 |
0.79 |
03/18 |
49.4 |
66.1 |
400.0 |
123.5 |
40.7 |
0.78 |
H119 |
38.3 |
77.8 |
394.9 |
125.2 |
41.3 |
0.77 |
03/19 |
29.8 |
87.7 |
381.0 |
126.1 |
41.6 |
0.77 |
Note: *Includes liquid securities but not funds held on behalf of EIS investors.
32.7% growth in direct investment portfolio
Mercia reported FY19 net assets of £126.1m (FY18: £123.5m). The direct investment portfolio grew by 32.7% to £87.7m. In Mercia Fund Managers, FUM fell 5% to £381m with the winding up of the successful RisingStars Growth Fund (15% IRR, TVPI of 528%). Net expenses rose to £1.4m (FY18: £0.4m), largely due to a one-off performance-related fee received in FY18, and staff and administrative expenses rose 13.9% as headcount was expanded to manage mandates won in FY18. Management reiterated its intention to achieve a sustainable position in the medium term, where revenue covers expenses before realised gains and fair value movements.
Brand repositioning: Mercia Asset Management
Mercia has changed its name to Mercia Asset Management to better reflect the balance of the business. Its stated intent remains to become the leading regional provider of supportive balance sheet, venture, private equity and debt capital in transaction sizes typically below £10m. Historically, Mercia has been closely associated with IP commercialisation. However, this categorisation no longer reflects the growth of the business, the diversity of its deal sourcing or the breadth of its investment portfolio, both debt and equity. IP commercialisation remains an important element of Mercia’s investment proposition, but today represents one of five principal sources of deal flow.
Valuation: 0.77x NAV, does not include MFM
Mercia’s shares continue to trade at a discount to NAV (0.77x), even before considering the embedded value of Mercia Fund Managers, which we believe should add 10p+ to NAV. Catalysts for a re-rating include meaningful commercialisation of the direct investment portfolio and/or further successful exits.
FY19 results review
Small rise in net assets
Mercia reported a net asset value of £126.1m at end FY19 (vs £123.5m at end FY18) or 41.6p per share (FY18: 40.7p), representing a small rise of 2% over the year. Direct investment of £19.4m was made into 17 portfolio companies (FY18: £21.1m, 17 companies) during the year, including two new direct investments, W2 Global Data Solutions and Locate Bio. Largely as a result of the £19.4m of direct investment, unrestricted cash and short-term liquidity investments fell from £49.4m at end FY18 to £29.8m at end FY19, in line with management guidance.
Funds under management (FUM) fell by 4.8% to £381.3m, from £400m at FY18. This fall in FUM was largely attributable to the winding up of the successful RisingStars Growth Fund, an early-stage fund that generated an investor IRR of 15% over its lifetime, total value to paid-in capital (TVPI) of 528% and distributions as a proportion of paid in capital (DPI) of 468%. The demonstrable success of this fund and the returns delivered to investors positions the group well to raise further funds in the future.
Group revenues increased by 4.7% to £10.7m (FY18: £10.2m), largely due to the full year contribution from fund management contracts won during FY18, split £7.3m from fund management fees, £1.1m from initial management fees and £2.1m from portfolio director fees. The prior year comparison was also flattered by a one-off £1.2m performance-related fund management fee.
Net expenses rose to £1.4m (FY18: £0.4m) due to the one-off performance-related fee, and staff and admin expenses of 13.9% to £12.1m (FY18: £10.6m), reflecting an increase in headcount (from 65 to 85 over the course of the year) required to manage the FY18 fund mandate wins. Management expects net expenses to level off for FY20. Management also reiterated its intention to achieve a sustainable zero net expenses position in the medium term, where revenues cover expenses before realised gains and fair value movements, to minimise NAV erosion.
Portfolio review: Direct investment up 32.7% vs prior year
Mercia’s direct investment portfolio grew from £66.1m in FY18 to £87.7m in FY19, with net portfolio investment of £17.7m (£19.4m less a £1.7m loan repayment), together with a fair value increase of £3.9m (FY18: £2.8m). Like previous reporting periods, Mercia’s top 20 direct investments represented 98.4% of total portfolio value.
Notable fair value uplifts included: nDreams (£1.1m); Intelligent Positioning (£1.3m); Faradion (£1.6m); Oxford Genetics (£0.6m); Medherant (£1.2m); The Native Antigen Company (£0.9m); and Voxpopme (£0.5m). On the downside, as well as the fair value write-off of Smart Antenna Technologies, Mercia also reflected a negative fair value movement of £0.5m on Concepta, recognising market movements on the AIM listed investment. A previous fair value provision for Soccer Manager was released as the company’s prospects were deemed to have materially improved with an acceleration in revenues, following Mercia’s proactive intervention.
Post year-end developments are as follows:
■
Further funding rounds for Voxpopme (£1.3m), Medherant (£1.5m) and Locate Bio (£1.8m).
■
£0.8m investment into MyLotus developer, Concepta, as part of a £2.3m placing in April 2019.
■
£0.5m invested into a new direct investment, Clear Review, a fast-growing SaaS business providing HR management tools.
■
nDreams announced a partnership with global technology company Oculus (Facebook), developing its first title – Phantom: Covert Ops. This received significant industry recognition including the Game Critics Award for the best VR/AR game at the E3 Expo in June 2019.
|
Exhibit 1: nDreams – Oculus partnership for Phantom: Covert Ops |
|
|
Source: nDreams, YouTube |
Exhibit 2: Direct investment portfolio
£000s |
Sector |
Net value 1/4/18 |
Net value 30/9/18 |
Net cash invested FY19 |
Fair value change FY19 |
Net value 31/3/19 |
% held at 31/3/19 |
nDreams |
Digital/digital entertainment |
12,979 |
12,979 |
1,029 |
1,112 |
15,120 |
45.5 |
Oxford Genetics |
Life sciences/biosciences |
9,090 |
9,090 |
433 |
638 |
10,161 |
33.3 |
Warwick Acoustics |
EMME |
6,152 |
7,152 |
1,500 |
252 |
7,904 |
62.5 |
Intechnica |
Software and the internet |
4,021 |
4,677 |
2,000 |
656 |
6,677 |
32.0 |
Ton UK t/a Intelligent Positioning |
Software and the internet |
4,216 |
4,216 |
- |
1,257 |
5,473 |
28.8 |
Impression Technologies |
EMME |
3,107 |
4,607 |
2,268 |
6 |
5,381 |
31.4 |
Medherant |
Life sciences/biosciences |
3,453 |
3,453 |
524 |
1,228 |
5,205 |
31.9 |
VirtTrade t/a Avid Games |
Digital/digital entertainment |
2,538 |
3,088 |
1,400 |
- |
3,938 |
28.4 |
Faradion |
EMME |
1,299 |
3,524 |
601 |
1,625 |
3,525 |
18.1 |
Voxpopme |
Software and the internet |
1,000 |
3,026 |
1,500 |
526 |
3,026 |
21.8 |
The Native Antigen Company |
Life sciences/biosciences |
1,942 |
2,324 |
- |
921 |
2,863 |
32.7 |
PsiOxus Therapeutics |
Life Sciences/biosciences |
2,377 |
2,377 |
- |
- |
2,377 |
1.5 |
Edge Case Games |
Digital/digital entertainment |
2,000 |
3,150 |
300 |
- |
2,300 |
21.2 |
Soccer Manager |
Digital/digital entertainment |
1,199 |
1,499 |
500 |
400 |
2,099 |
31.6 |
W2 Global Data Solutions |
Software and the internet |
- |
- |
2,000 |
- |
2,000 |
17.4 |
LM Technologies |
EMME |
1,913 |
1,913 |
- |
- |
1,913 |
41.4 |
sureCore |
EMME |
1,500 |
1,834 |
334 |
- |
1,834 |
24.4 |
Aston EyeTech t/a Eyoto |
Life sciences/biosciences |
1,750 |
1,750 |
4 |
1 |
1,755 |
18.7 |
Crowd Reactive |
Software and the internet |
1,650 |
1,637 |
(61) |
- |
1,589 |
26.2 |
Concepta |
Life sciences/biosciences |
1,306 |
1,203 |
365 |
(538) |
1,133 |
18.2 |
Locate Bio |
Life sciences/biosciences |
- |
- |
500 |
- |
500 |
6.0 |
Smart Antenna Technologies |
EMME |
2,148 |
3,348 |
1,900 |
(4,048) |
- |
32.2 |
Other direct investments |
430 |
980 |
576 |
(120) |
886 |
n/a |
|
Total |
|
66,070 |
77,827 |
17,673 |
3,916 |
87,659 |
n/a |
Source: Mercia. Note: EMME is Electronics, Materials, Manufacturing and Engineering. Excludes post year-end investments.
Valuation: Mercia looks undervalued at 0.77x NAV
In line with Mercia’s intent to become the leading regional provider of supportive balance sheet, venture, private equity and debt capital in transaction sizes typically below £10m, we have broadened Mercia’s valuation peer group to include a broader range of direct private equity and venture capital investors, as well as IP commercialisation companies.
Mercia trades at a 23% discount to FY19 NAV, below the mean and median of the peer group and, in our view, unwarranted given the strength of the business and its underlying operating model.
Exhibit 3: Peer group comparison
Price |
Currency |
Market cap (m) |
NAV (m) (last reported) |
Cash/(debt) (m) |
NAV multiple |
NAV per share (p) |
|
Allied Minds |
72.7 |
GBP |
175.0 |
218 |
40 |
0.80 |
91 |
Arix Bioscience |
136 |
GBP |
184.4 |
270 |
91 |
0.68 |
200 |
IP Group |
75.1 |
GBP |
795.4 |
1218 |
219 |
0.65 |
115 |
Malin Corporation |
3.80 |
€ |
173.6 |
392 |
(12) |
0.44 |
8.57 |
HgCapital |
221.5 |
GBP |
891.8 |
802 |
102 |
1.11 |
215 |
Oakley Capital |
235.0 |
GBP |
481.3 |
575 |
212 |
0.84 |
281 |
Draper Esprit |
550.0 |
GBP |
648.6 |
619 |
100 |
1.05 |
524 |
Augmentum FinTech |
112.0 |
GBP |
105.3 |
98 |
44 |
1.08 |
104 |
Mean |
0.83 |
||||||
Median |
0.82 |
||||||
Mercia |
31.7 |
GBP |
96.1 |
126 |
30 |
0.76 |
41.6 |
Adjustment for embedded funds business |
32 |
10.6 |
|||||
Mercia + Adjustment |
31.7 |
GBP |
96.1 |
158 |
30 |
0.61 |
52.1 |
Source: Refinitiv data, Edison Investment Research. Note: Priced as at 5 July 2019.
NAV excludes the embedded funds business
Mercia’s strategic goals remain to grow the value of the direct investment portfolio, while also seeking to expand FUM to allow the group to reach a sustainable position over the medium term, where revenue covers expenses before realised gains and fair value movements.
These goals underline that the NAV-based valuation does not properly reflect the embedded value of Mercia Fund Managers, whose fees already cover a significant proportion of the group’s net expenses. Placing these fees on a relatively conservative 3x EV/Sales multiple implies a value of £32m or 10.6p per share for Mercia Fund Managers (from 9p based on EV/Sales and P/E previously). Adjusting the NAV calculation for this embedded value (see Exhibit 3), suggests that Mercia is trading at closer to 0.61x the group’s adjusted value.
In our view, this level of discount does not reflect either the strategic positioning of the portfolio or the strength of Mercia’s underlying operating model.
Group overview
Mercia Asset Management
Despite the name change last week, Mercia’s business model remains the same. 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.
Historically, Mercia has been closely associated with IP commercialisation. However, this categorisation no longer reflects the growth of the business, the diversity of its deal sourcing or the breadth of its investment portfolio, both debt and equity. Through its 19 university partnerships, IP commercialisation will remain an important element of Mercia’s overall investment proposition, but today represents one of five principal sources of deal flow (the others being direct sourcing from Mercia’s own network, client referrals, advisor referrals and cross-referrals).
|
Exhibit 4: Mark Payton, CEO on Mercia’s FY19 results |
|
|
Source: Mercia Asset Management, Edison Investment Research |
Funds overview
Mercia invests in both growing its pipeline and its existing portfolio companies through four pools of capital under management: balance sheet (£87.7m portfolio fair value, £30m unrestricted cash), venture (FUM £224.1m), private equity (£61.2m) and debt (£96.0m). In aggregate, the company manages assets under management (AUM) of c £500m, of which FUM accruing management fees represent £381m.
We include below introductory snapshots from the Fund Principals for each of for each of Mercia’s three main business lines. Venture, including EIS and IP commercialisation, represents the majority (FY19: 59%) of the group’s funds under management, but private equity (16%) and debt (25%) together represent a substantial proportion of overall funds.
|
Exhibit 5: Split of funds under management (FUM) |
|
|
Source: Mercia Asset Management, Edison Investment Research |
Fund performance and returns
To date, Mercia’s closed and legacy funds have returned c £177m, with vintages varying from 10 to 16 years and with typical IRRs of 15–17%.
Venture – FUM £224.1m
Venture capital remains an important source of funding for entrepreneurial start-ups and young, growing companies. Mercia is one of the leading providers of venture capital and equity funding to small businesses in the UK regions, providing funding in the range of £0.05–2m across all sectors of the UK economy.
|
Exhibit 6: Will Clark, Fund Principal – Venture |
|
|
Source: Mercia Asset Management, Edison Investment Research |
Private equity – FUM £61.2m
Through its EV Growth Funds, Mercia is one of the most active investors backing management teams looking to scale. It offers equity investment of up to £5m for purposes including expansion finance, to support management buyouts and buy-ins, acquisition finance, cash-out transactions and preparing for succession planning.
Mercia structures packages of debt and equity that deliver returns through a combination of yield, performance-related dividends and capital gain on exit, typically over a period of three to five years.
|
Exhibit 7: Wayne Thomas, Fund Principal – Private Equity |
|
|
Source: Mercia Asset Management, Edison Investment Research |
Debt – FUM £96.0m
Mercia provides debt funding ranging from £0.1m to £1m to both start-up and established businesses, across all sectors to businesses based anywhere in the UK.
Debt is available for a wide range of purposes: additional working capital to fund expansion plans, cover the cost of fulfilling a new contract or buying stock. Alternatively, businesses may need to borrow money to acquire a new property, improve existing premises or invest in plant machinery, new IT systems or other one-off business expenses. Mercia can often help in situations where banks and other lenders are unable to provide the full requirement.
Packages are tailored to individual business requirements with competitive rates and terms. Funding is typically for a period of up to five years, with rates fixed for the duration.
|
Exhibit 8: Paul Taberner, Fund Principal – Debt |
|
|
Source: Mercia Asset Management, Edison Investment Research |
Exhibit 9: Financial summary
£'000 |
2015 |
2016 |
2017 |
2018 |
2019 |
||
31-March |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
|||||||
Revenue |
|
|
508 |
1,755 |
6,660 |
10,197 |
10,675 |
Cost of Sales |
(10) |
(79) |
(92) |
0 |
0 |
||
Gross Profit |
498 |
1,676 |
6,568 |
10,197 |
10,675 |
||
Operating costs |
(1,495) |
(4,011) |
(9,051) |
(10,633) |
(12,115) |
||
Fair value changes |
3,934 |
896 |
4,268 |
2,823 |
3,916 |
||
Realised gains |
0 |
0 |
839 |
871 |
0 |
||
Normalised operating profit |
|
|
2,937 |
(1,439) |
2,624 |
3,258 |
2,476 |
Amortisation of acquired intangibles |
0 |
(17) |
(301) |
(301) |
(301) |
||
Exceptionals |
(1,018) |
(372) |
(1,125) |
(1,125) |
0 |
||
Share-based payments |
(44) |
(230) |
(395) |
(497) |
(171) |
||
Reported operating profit |
1,875 |
(2,058) |
803 |
1,335 |
2,004 |
||
Net Interest |
93 |
361 |
186 |
274 |
562 |
||
Joint ventures & associates (post tax) |
0 |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
3,030 |
(1,078) |
2,810 |
3,532 |
3,038 |
Profit Before Tax (reported) |
|
|
1,968 |
(1,697) |
989 |
1,609 |
2,566 |
Reported tax |
0 |
0 |
54 |
54 |
54 |
||
Profit After Tax (norm) |
3,030 |
(1,078) |
2,810 |
3,532 |
3,038 |
||
Profit After Tax (reported) |
1,968 |
(1,697) |
1,043 |
1,663 |
2,620 |
||
Minority interests |
0 |
0 |
0 |
0 |
0 |
||
Discontinued operations |
0 |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
3,030 |
(1,078) |
2,810 |
3,532 |
3,038 |
||
Net income (reported) |
1,968 |
(1,697) |
1,043 |
1,663 |
2,620 |
||
Basic average number of shares outstanding (m) |
212 |
212 |
224 |
302 |
303 |
||
EPS - basic normalised (p) |
|
|
1.43 |
(0.51) |
1.26 |
1.17 |
1.00 |
EPS - diluted normalised (p) |
|
|
1.43 |
(0.51) |
1.21 |
1.13 |
0.96 |
EPS - basic reported (p) |
|
|
0.93 |
(0.80) |
0.47 |
0.55 |
0.86 |
Dividend (p) |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
(-29.7) |
245.5 |
279.5 |
53.1 |
4.7 |
||
Gross Margin (%) |
98.0 |
95.5 |
98.6 |
100.0 |
100.0 |
||
Normalised Operating Margin |
578.1 |
-82.0 |
39.4 |
32.0 |
23.2 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
27,121 |
50,103 |
63,693 |
77,428 |
98,724 |
Intangible Assets |
2,455 |
11,815 |
11,514 |
11,213 |
10,912 |
||
Tangible Assets |
49 |
145 |
151 |
145 |
153 |
||
Investments & other |
24,617 |
38,143 |
52,028 |
66,070 |
87,659 |
||
Current Assets |
|
|
54,349 |
31,730 |
64,576 |
53,965 |
31,180 |
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
716 |
798 |
747 |
1,057 |
782 |
||
Cash & cash equivalents |
23,633 |
20,932 |
28,829 |
42,908 |
25,210 |
||
Short term liquidity investments |
30,000 |
10,000 |
35,000 |
10,000 |
5,188 |
||
Current Liabilities |
|
|
(631) |
(1,521) |
(6,698) |
(7,760) |
(3,730) |
Creditors |
(631) |
(1,521) |
(6,698) |
(7,760) |
(3,730) |
||
Tax and social security |
0 |
0 |
0 |
0 |
0 |
||
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
0 |
(271) |
(217) |
(163) |
(109) |
Long term borrowings |
0 |
0 |
0 |
0 |
0 |
||
Other long-term liabilities |
0 |
(271) |
(217) |
(163) |
(109) |
||
Net Assets |
|
|
80,839 |
80,041 |
121,354 |
123,470 |
126,065 |
Minority interests |
0 |
0 |
0 |
0 |
0 |
||
Shareholders' equity |
|
|
80,839 |
80,041 |
121,354 |
123,470 |
126,065 |
CASH FLOW |
|||||||
Op Cash Flow before WC and tax |
2,943 |
(1,406) |
2,700 |
3,339 |
2,560 |
||
Working capital |
(20) |
650 |
5,250 |
(87) |
(3,724) |
||
Exceptional & other |
(4,952) |
(1,268) |
(5,107) |
(3,694) |
(3,916) |
||
Tax |
0 |
0 |
0 |
0 |
0 |
||
Net operating cash flow |
|
|
(2,029) |
(2,024) |
2,843 |
(442) |
(5,080) |
Capex |
(27) |
(113) |
(82) |
(75) |
(92) |
||
Acquisitions/disposals |
(11,563) |
(20,939) |
(8,779) |
(10,664) |
(17,673) |
||
Net interest |
22 |
397 |
165 |
260 |
531 |
||
Equity financing |
67,230 |
(22) |
38,750 |
0 |
(196) |
||
Dividends |
0 |
0 |
0 |
0 |
0 |
||
Other |
(30,000) |
20,000 |
(25,000) |
25,000 |
4,812 |
||
Net Cash Flow |
23,633 |
(2,701) |
7,897 |
14,079 |
(17,698) |
||
Opening net debt/(cash) |
|
|
(39) |
(23,633) |
(20,932) |
(28,829) |
(42,908) |
FX |
0 |
0 |
0 |
0 |
0 |
||
Other non-cash movements |
(39) |
0 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(23,633) |
(20,932) |
(28,829) |
(42,908) |
(25,210) |
Closing net debt/ (cash) inc short-term liquidity investments (not EIS) |
(53,633) |
(30,932) |
(59,601) |
(49,435) |
(29,798) |
||
Source: Mercia Asset Management, Edison Investment Research
|
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Research: Healthcare
Hutchison China MediTech (HCM) has announced positive data that key late-stage asset surufatinib met the primary endpoint of PFS in non-pancreatic at the Phase III interim analysis. This translates to an earlier than expected China NDA submission (H219) and the potential launch of HCM’s first un-partnered asset (early 2021). In China, partner Lilly has launched Elunate (fruquintinib) capsules. Early sales look promising and its potential inclusion on the China NRDL later this year will be definitive to the China opportunity. However, failure of fruquintinib monotherapy in third-line NSCLC and the changes in strategy to savolitinib in RCC has negatively affected our valuation. We forecast two further product launches on the horizon in 2021/2022 (China launch of fruquintinib in gastric cancer and global launch of savolitinib in NSCLC). HHHL has completed a secondary offering of ADSs, which has reduced its holding to 51.15% (from 60.2% previously). We see this as a significant positive for HCM as it increases the free float, potentially leading to better liquidity. We value HCM at $5.6bn ($42.23/ADS) vs $6.5bn previously.