Mercia is very cheap and has a durable growth flywheel

4th Jul '22 by mojomogoz

15 comments 1705 reads

Mercia Asset Management (LON:MERC) takes some digging and thinking to understand as it's a bit layered. I recommend you do that before buying as not understanding the dynamics of business and how it creates value means you will likely get shaken out inopportunely.

Superb value…but I only care if it comes with a growth engine

They publish annual results Tuesday 5 July and I expect them to show meaningful incremental value creation and in this post I outline why I think it presents superb value and probably excellent long term growth. 'Growth' is always more intangible and deferred than 'value' but IMO value is never a reason to buy a share in an operating company. Buy Mercia if you agree with what I see as a growth flywheel created through synergy of its two value drivers. More on the growth engine later.

Mercia is two companies folded into one

1) A listed investment vehicle (akin to an investment trust) hold a portfolio of c.20 VC investments and cash. I estimate the year end value (31 March) to be at least £177.4m (£111.4m investments and £66m cash). Note, these numbers are estimates taking into account reported value changes and disposals since interim results for 30 Sept 2021 and things like write downs in underlying holdings or further deployment of cash will change both the portfolio valuation and the amount of cash available to be deployed. Its very likely actual cash is lower by £5m or so due to deployment I haven't been able to account for but I'm not going to guess that number and will wait to see what is reported (so remember this when I go through some crude value arguments below).

2) An asset management business with approx £850m AUM (my estimate for 31 March year end based on disclosed information) excluding direct VC investments and cash in unlisted early stage UK companies. Looking at past reporting there is an average total fee revenue of approx 2.5%pa (before performance fees) on AUM. That's high fee income well in excess of what a Jupiter Fund Management (LON:JUP) or Impax Asset Management (LON:IPX) can charge.

As of market close on 1 July 2022 you get the above for £126.5m.

The value cut

This is a very simplified look at valuation. It contains assumptions by me re FY22 results and dividend payout. These are…

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mojomogoz

4th Jul '22

The above done hastily as results tomorrow. May contain errors, typos or missed analysis as a result so I'll return later to check

Snowbum

Thanks for the reminder about Mercia Asset Management (LON:MERC) @Mojo, it was one I’d been looking to add to my SIPP holdings.

As a technician, the current price also spears to be sitting at long term and mid term trendline support, rsi and stochastic are also supportive of the reversal potential at the current area offering an attractive overall set up. I may well take a starter position, I’d like to see price hold the low from last month though to validate it fully.

Cheers, Forbsy.

illiswilgig

Thanks Mojo,

good write up. Excellent description.

You know the company and the industry far better than I do - so I am hesitant to add anything but here goes - I like the northern bias and the unversity networking. It takes time to build up these relationships and their reputation as a good partner for spin-outs from academia. These campuses are sources of amazing technology which can be overlooked. The businesses tend to need time and assistance to build a proof-of-concept business. But the exit is never (well almost never) going to be a 'nadaq listing' - it's a sale to a multinational that can take it to the next level. Faradion being a good example in my view - though sad to see it go and I just hope that they got the right partner in this case.

I'd forgotten the results were tomorow, despite having signed up for the investor presentation - thank you for the timely write-up!

Still adding at current prices,

cheers

Mark

No worries Forsby. I'm pretty long term and no technicals. I owned before the covid crisis (sadly only entering at prices in high 20s), took part modestly in the late 2019 raise to acquire Northern Ventures and then bought a decent bit more around covid lows (I'd maybe have bought a good chunk more back then but there was a lot of buying to do and only so much funding!). So I was nicely up if not spectacular. The recent sell off is overdone IMO and I think today is just about the best value for what's there and proven there has been. Particularly, its my belief that they do not think they need to raise to acquire more 3rd party AUM as they have enough cash to fund their own growth now (in terms of balance sheet investments and inorganic acquisition of AUM) and I don't think that is priced. So I have bought a decent amount more in the sub 30p range in last month or so

Mercia Asset Management (LON:MERC) is at the lower risk/return end of spectrum for me in terms of the upside I can imagine. I believe its an 'easy' double in terms of fundamentals and they should be robust to woes that more 'reckless' VCs will experience. The long duration growth opportunity will take a bit more proving out but its my belief that its there and just not shown through clear enough to market yet.

So I'm hopeful, never certain, that I'm getting a long duration grower at a real value price.

I agree. Most often exits will be industry buyer rather than spun out to listing. This is more robust IMO as it means that portfolio management and exit is not beholden to market sentiment as many VCs are going to be finding out. In addition, as they will tend not to be in the unicorn territory the business are not so large that Mercia's only option is to float. That said there may be occasional unicorn and at the moment I believe that the business thinks that Sense-Bio is on track for Unicorn (https://sense-bio.com/). Not sure of current valuation but I believe the late 2021 funding round put them $250m. Note the EIS funds are the main investors from Mercia in this company and the balance sheet more recent...interesting to see whether they take more of a position or whether it stays relative small for balance sheet (currently they own c.10% of company with nearly 9% of that in the EIS funds). Note, that Sense isn't a covid play...covid just provided an opportunity to demonstrate and accelerate their instrument free portable diagnostic platform for infectious diseases that can used easily and rapidly outside of typical medical setting

Just put up revised copy taking out many typos and bad explanations. Apologies but rushed to put out earlier today before meetings and was a bit of a stream of consciousness!

Also here on Medium for non Stocko subscribers - https://mojomogoz.medium.com/m...

5th Jul '22

My 3rd party AUM figures off by near £90m! Due to £45m of new biz recognised after year end and then £45m of distributions in H2 (mainly from EIS and VCT)

qimotte

31st Jul '22

The following update from Edison following the recent results maybe of interest: Link to Edison Update - July 29

2nd Nov '22

Its even cheaper following general bear mauling...no doubt other things will have more beta to upside if you want to chase bounces (...if it continues) but value + growth here looks secure. Obviously, a revaluation of big holding can drive surprise.

Informative IMC presentation going over some of their investments in 3rd party funds rather than balance sheet (though there is some overlap). Some investee companies presenting too.

https://www.investormeetcompan...

Seeing as I used better known Molten Ventures (LON:GROW) as a comparison stick for Mercia Asset Management (LON:MERC) interesting to see their interim results today

https://www.investegate.co.uk/...

Note the Molten write downs in value of holdings due to public markets and low realisations means that investment cash may need to be sourced by tapping the market (even with such a discount to NAV!). We don't know what has happened for Mercia portfolio until they report but my guess based on parsing comments is NAV will be up

25th Jul '23

Copy and paste from SCVR:

We had some bid excitement on Gresham House (LON:GHE) recently. I do wonder if the same may be going on at Mercia Asset Management (LON:MERC)?

I've cooled and have been a seller incrementally over last 2-3 mths such that I hold about 40% of my original stake. Selling decent size chunks to market has been easy. Much easier than at times in the past it seems. Maybe just someone hungry to buy more? Maybe a stalker? I'm not expert enough to tell.

Its still got a lot going for it including a deep discount to NAV with a 3rd party asset manager that makes a tidy profit and gives a sustainable 3.5% dividend payout (even though market cap is dominated by proprietary non yielding balance sheet investments (ie asset mgt kicking out tidy cash!). However, I never buy or hold purely on value...

I've never really liked the 20:20 corporate strategy. 20% earnings (which are significantly a function of value realisation in balance sheet holdings) and 20% AUM growth per annum over 3 years. The acquisition of Frontier Development Capital bringing c.£415m AUM for a c.£9.5m purchase price looks like a neat move at face value...but my sneaking suspicion is that this was opportunistic to reach corporate targets set after the covid snafu (so basement values) but before the inflation/rates follow on snafu and I can't help feel that FDC is not an ideal acquisition given the sort of debt and property lending its involved in. There's great value creation opportunity in developing greater mezzanine debt capability at Mercia...but you don't but FDC for that.

Then there are some of the large balance sheet investments. I think they should have realised an exit on some of them but haven't. It makes me think that further value from them might be hard (I do believe that Mercia hold assets conservatively and have generally been excellent at managing poorer holdings effectively...kudos). Something like nDreams (biggest holding) a growing VR games maker may go on to create much more value...but its just too long in the tooth as a holding and something should have happened by now if it were a desirable asset is my niggle (and the IPO route doesn't look possible anymore). There are others.

Anyway, Mercia will probably bounce from here...and I have suspicion they could be a takeover target. But as value abounds in UK and I look for durable long term growth I feel less inclined to Mercia. I also see a growing downside risk whereby a big investment proves to be a damp squib and that keeps the valuation low and sentiment poor. In extreme we could see NAV moving down towards share price.

turbo

8th Mar

Back in Nov 2023, Mercia announced a share buyback programme of up to £5 million. Latest RNS indicates buyback has reached around £2.58 million so far.

On 29 Feb 2023 Mercia announced that it has been appointed to manage three of the British Business Bank's ("BBB") new Midlands Engine Investment Fund II ("MEIF II") mandates, representing a total of £207.0 million in new funds under management ("FuM").

Last few days has seen a spike in trade volume.

Do I see signs of possible uptick in the SP?

(I hold)

13th Mar

13 Mar 2024 GMT

3 Northern VCTs complete fundraise

Mercia Asset Management (LON:MERC) has hailed news of a successful fundraise by its three Northern Venture Capital Trusts.

Some £60 million was raised through new share offerings launched in September, Mercia said in a statement, with an initial allotment taking place in January.

“I am delighted that the Northern VCTs have achieved a significant fundraise in the context of a more challenging fundraising environment,” chief executive Mark Payton commented.

“The successful £60 million fundraise underscores the trust Mercia has built in managing the Northern VCTs, which remain a vital source of investment for small and medium-sized enterprises navigating the current economic climate.”

Mercia’s Northern VCTs form part of the firm’s third-party funds under management and include Northern Venture Trust PLC, Northern 2 VCT PLC and Northern 3 VCT PLC.

Remaining new shares from the fundraise will be allotted in early April, Mercia added.

Just discovered Mercia Asset Management (LON:MERC) made it into Graham Neary's 'Ten Small-Cap Value and Growth Ideas for 2024'

Nice to know I'm in good company :)

21st Mar

Mercia secures two further major British Business Bank fund management contracts

"Mercia Asset Management (LON:MERC) is pleased to announce that it has been appointed to manage two further new British Business Bank ("BBB") fund mandates under its 'Nations and Regions Investments' Northern Powerhouse Investment Fund II initiative ("NPIF II")."

NPIF II - Equity YH LP: £100.0 million for investment in Yorkshire and the Humber to be managed by Mercia Regional Ventures.
NPIF II - Debt YH LP: £53.0 million for lending in Yorkshire and the Humber to be managed by Mercia Business Loans.
Funds to be managed by staff across Mercia's existing offices in Sheffield, Leeds, and Hull, focusing on supporting SMEs in Yorkshire and the Humber region.
Total new Funds under Managemen (combined with previous mandates) is now £360.0 million.
Anticipated incremental annual revenues of approximately £4 million, net of revenue reductions as existing BBB mandates enter realization phase.
New fund mandate awards align with Mercia's strategic focus on growing profitable third-party fund management operations.

Mercia is very cheap and has a durable growth flywheel

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Mojomogoz

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