Mercia’s business update highlighted the breadth of its portfolio (c 400 companies) and the strength of its cash position – £30.4m of unrestricted balance sheet cash and £190m of investment capital in its managed funds, giving c £220m of uninvested cash. However, with lower revenues now expected in FY21, Mercia also recognises that the valuations of both the NVM VCT portfolios, whose fund management contracts were acquired in December (22% fall in average NAV), and its own portfolio have been affected by market conditions. With group results not due until July, based on a read-across from the 22% fall in the NVM portfolios, we calculate a hard NAV for Mercia of 25.0p. Added to our assumption of the value of the third-party fee-earning funds business (2–3% of a reduced FUM), this would imply an indicative value for Mercia of 30.6–33.4p. Mercia trades at a c 50% discount to our indicative value today.
It is worth reiterating that over the last six months, Mercia has made significant strides as a business and investment proposition. The acquisition of NVM’s VCT business (with one-third of consideration deferred) helped to scale its third-party funds under management (FUM), with the ratio of third-party funds to balance sheet now c 80/20. In the process, Mercia extended its cash runway, broadened its share register, increased the free float (c 64%) and significantly reduced the share overhang.
Management intends to move towards a sustainable financing model with an evergreen balance sheet. There is embedded value in Mercia, including its holding in The Native Antigen Company, a leading supplier of reagents that enables research into vaccines and diagnostics for emerging and endemic infectious diseases, which announced the commercial introduction of its novel coronavirus antigens in February 2020.