Mercia’s FY20 results reflect continued progress, delivering on management’s three-year strategy. AUM climbed 58% to £0.8bn, while FUM rose 73% to £658m. Following the acquisition of the NVM VCT fund management business, the company is operationally profitable on a monthly basis, with annual revenues exceeding operating costs for the first time in FY20. Net assets rose 12% to £141.5m, with the direct investment portfolio stalled at £87.5m reflecting the impact of COVID-19 fair value adjustments and a £15.7m net investment. The group remains well-placed for a downturn with £30m of unrestricted balance sheet cash and £320m of group cash. Post period end the group exited The Native Antigen Company, with £5.2m in cash (8.4x return, 65% IRR) expected. Despite the group’s progress, Mercia’s shares continue to trade at a material discount to NAV (0.60x), even before considering the embedded value of the third-party fund management business (> 4.5p at 3% of AUM).
Companies: Mercia Asset Management Plc
With the sale of The Native Antigen Company (NAC) for up to £18m in cash, Mercia expects to realise £5.2m (1.2p per share) for its 29.4% stake. This exit delivers another significant milestone in management’s strategy to achieve an evergreen funding model. Management has confirmed that the group is profitable on a day-to-day basis following the acquisition of the NVM VCT management contracts (NVM) in December 2019. NVM, together with additional allocations from the British Business Bank (BBB), has lifted AUM to c £800m. Management’s three-year strategy targets a sustainable, evergreen balance sheet with AUM of £1bn in FY22, with future investment commitments met through existing cash resources and realisations without the need for further recourse to the markets. Despite real progress, Mercia trades at 0.69x its September 2019 NAV, with the fee-earning funds business as further upside, not captured in an NAV-based calculation. FY20 results are due on 14 July 2020.
The Native Antigen Company (“NAC”) has been acquired by LGC for up to £18.0m – with the ongoing COVID pandemic highlighting the value of knowledge and execution in the infectious diseases space. Mercia invested in NAC via both its balance sheet and 3rd party funds. The exit represents a strong return for both sources of capital, validating complete connected capital to optimise value creation. For the balance sheet stake, the £5.2m proceeds represent a £2.5m gain on realisation (c.1.5% of our FY21e NAVps). Final Results will be announced next week, when we will review our forecasts. The shares are currently trading at a 45% discount to NAV (which is 20% cash). Today’s exit demonstrates justification for a much narrower discount, if not a premium, to conservative carrying values.
Caribbean Investment Holdings. Incorporated in Belize . CIHL primarily operates financial services businesses through its subsidiaries The Belize Bank Limited and Belize Bank International Limited, both located in Belize and international corporate services through Belize Corporate Services Limited. CIHL shares are also traded on the Bermuda Stock Exchange. Lord Ashcroft holds 75%. No capital raise. Due 28 April. £36m . 2019 net profit US$ 10.7m
Companies: PANR TON PRSM TAM KMK RBGP LID MERC BARK TM17
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.
Mercia’s acquisition of NVM’s VCT fund management business and the £30m (gross) equity raise was approved by shareholders at the General Meeting on 20th December. We updated our forecasts, reflecting the strong shift towards cash profitability as a result of the acquisition, as well as the impact of the associated fundraise. Our detailed note, published following the GM, can be found here. We would also highlight that £15m of the equity raised will drive the balance sheet portfolio towards an evergreen state (realisations fund follow on). Using balance sheet valuations and a peer group approach for the asset management platform indicates a 40p/share intrinsic value, vs a 26p current share price.
In parallel with its H120 interim results, Mercia has announced the acquisition of NVM’s VCT business for up to £25m in cash and equity, funded by a £30m placing at 25p per share (a 22% discount). Subject to shareholder approval, the acquisition increases AUM to £760m and moves Mercia towards being the UK’s number one regional investor. The deal expands Mercia’s shareholder register, further dilutes existing major shareholders and means Mercia should be profitable before fair value adjustments, closer to its target of an evergreen model (c £1bn AUM). In its H120 results, Mercia’s direct investment portfolio increased to £102.0m, with £11.1m of cash invested in 16 companies and a fair value uplift of £3.2m. Mercia has £17.8m of unrestricted balance sheet cash (pre-placing) and the shares continue to trade at a significant discount to NAV.
Mercia has announced the proposed acquisition of three VCT contracts for a total consideration of up to £25m, which would add £270m AuM – driving the group to pro-forma cash profitability from asset management in the first full year. An accelerated bookbuild has been launched to raise £30m (gross) at 25p in order to fund the initial acquisition consideration (£12.4m) and £15m to drive the Mercia balance sheet towards an evergreen (self-funding) position. Interim results, also announced, show NAV growth (+2.6%) including £3.2m net revaluation gains in the portfolio. As joint broker to Mercia, we await the outcome of the General Meeting (20/12) before updating our forecasts.
AMRYT PHARMA PLC— a biopharmaceutical company focused on developing and delivering innovative new treatments to help improve the lives of patients with rare or orphan diseases have raised $60m before expenses and will relist on the AIM Market on the 25/09/2019. VAALCO Energy, Inc. (NYSE: EGY), an independent energy company focused on development and production assets in West Africa, today announces its formal intention to seek a Standard Listing on the Main Market of London Stock Exchange ("LSE"), to complement its existing Listing on the New York Stock Exchange. Kaspi.kz, the largest Payments, Marketplace and Fintech Ecosystem in Kazakhstan with a leading market share in each of its key products and services, announces today the expected publication of a registration document that has been submitted for approval to the FCA and its potential intention, subject to market conditions, to undertake an initial public offering . Registration document approved for Helios Towers. The Group provides essential network services, flexible infrastructure solutions and reliable power supply to mobile network operators in five African growth economies. Revenue increased 7 per cent. year-on-year to US$191m (H1 2018: US$178m), with Adjusted EBITDA up 15 per cent. year-on-year at US$99m (H1 2018: US$86m) for the six months ended 30 June 2019.
Companies: CKT IDEA SIXH IMMO EOG AMP SGM MERC RQIH AMYT
AMRYT PHARMA PLC— a biopharmaceutical company focused on developing and delivering innovative new treatments to help improve the lives of patients with rare or orphan diseases have raised $60m before expenses and will relist on the AIM Market on the 25/09/2019
Companies: IMMO MERC IQG DUKE ZIN FUM AGL ULS ODX IKA
In this interview Mark Payton, Mercia’s CEO, discusses the latest FY19 results, the rationale for the group’s rebranding to Mercia Asset Management and the outlook for the business in FY20. We also invited the three fund principals responsible for venture (Will Clark), private equity (Wayne Thomas) and debt (Paul Taberner) to outline the positioning, track record and opportunities that lie ahead for their respective business areas.
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To achieve YoY revenue growth over H1/20A despite the challenges of Covid-19 and its impact on the travel sector is testament to Equals' resilience and increasing focus on B2B and International payments services. While weaker gross profit and EBITDA margins have impacted profitability in H1/20, we see potential for an earnings recovery in H2/20 given cost reduction measures currently being undertaken. This should lead Equals to cash breakeven in Q4/20 and FCF positive by early FY21.
Companies: Equals Group Plc
Litigation Capital Management has announced FY20 results with gross profit up 7% to A$21.7m and PBT of A$9.2m, slightly behind expectations albeit the Group had already flagged that delays to 3 cases during the year would result in resolutions in FY21, thereby impacting FY20 results. That said, excellent strategic progress through the year and good news flow as well as increasing scale suggests more value to come. Reiterate buy
Companies: Litigation Capital Management Ltd.
In June, faced with the task of replacing its longstanding portfolio manager, Alistair Mundy, Temple Bar Investment Trust’s (TMPL’s) board reiterated its commitment to a value style of investing. The board has now opted to hand the management contract to Nick Purves and Ian Lance of RWC Partners, two managers with considerable experience of managing income portfolios using a value-style approach. Value investing, where managers buy stocks that are valued more cheaply than market averages – based on measures such as price/earnings, price/book and yield – is deeply out of favour. The RWC team says that value stocks have never looked more unloved in the 30- odd years that they have been managing money. In their view, this makes it imperative that TMPL investors keep faith with the strategy and it also means this is an attractive entry point for new investors. One important change, however, is a cut to TMPL’s dividend to a level that the RWC team believes will be more sustainable.
Companies: Temple Bar Investment Trust
FY20A results largely reflect a period prior to the Covid-19 lockdown, yet show Duke entering a more challenging FY21E with momentum. Yesterday's trading update demonstrated another notable rise in quarterly cash receipts for Q2/21, as royalty partner trading continues to improve. As some partners' forbearance measures will expire this month, Q3/21 receipts should continue this upwardly momentum. This opens the door to a return to cash dividends at some future point. Today, Duke also confirms it is now seeking new royalty partners, alongside follow-ons.
Companies: Duke Royalty
HSBC’s future should be clarified as soon as the US and China come back to the negotiation table. This will not happen before the US elections are over. In the meantime, HSBC will continue to be instrumentalised and its share price will remain under pressure.
Companies: HSBC Holdings Plc
L&G reported an operating profit from continuing divisions (excluding Mature Savings and General Insurance businesses) of £1,128m, -2.2% yoy. The COVID-19-related cost was £129m. LGR posted a growing operating profit to £721m. Net profit amounted to £290m vs. £874m a year before, being affected by the reduced discount rate used to calculate LGI reserves. The Solvency II ratio stood at 173%. The Board recommended an interim dividend of 4.93p/share, stable relative to H1 19.
Companies: Legal & General Group Plc
S4 Capital had an extraordinary week with strong interims and an impressive CMD accompanied by a further merger and topped off with winning its third Whopper. Interims were ahead of our expectations and we were particularly encouraged by LFL Gross Profit growth of +18% in July. The group announced the merger with Dare.Win, an award-winning digital creative agency which extends the geographical presence of MediaMonks to France. BMW and MINI consolidated its Pan-European account into a team led by MediaMonks, which is the third whopper account for S4 Capital, and notable in our view for being won in a pitch, rather than by land & expand, and being an automotive rather than technology client. The group held a three day CMD and our summary would be i) Day One demonstrated the compelling strategic logic and strict financial discipline underpinning the group ii) Day Two illustrated the already formidable partner/client list of S4 Capital, including Adobe, Amazon, Google and CAA and iii) Day Three highlighted the chemistry between the individual agencies brought together to form S4 Capital and the outstanding work that they produce. To reflect BMW and Dare.Win we raise our FY21 EPS forecast by +8% to 10.8p (was 10.0p) and continue to view 15p as a realistic target with further whoppers in prospect and the balance of the recent equity raise to deploy. On a 30x multiple, we raise our target price to 450p (was 375p) and retain our Buy recommendation.
Companies: S4 Capital Plc
Today's news & views, plus announcements from VOD, POLY, SMDS, BLND, BYG, WEIR, DC, SNR, SHI, INTU, IHR, CNC, ARE, INCE
Companies: INTU SHI INCE
The impressive full year 2019 results included some eye-catching numbers, including a record PBT of £40.1m (nearly 3x FY18 @ £14.3m), £620m of reserves acquired over 16 legacy deals, and $842m of (estimated) Contracted Premium in the Program business – on track to breach $1bn in FY20 as previously guided and $1.5bn-$2bn in 2022-2023.
Companies: Randall & Quilter Investment Holdings Ltd.
The COVID-19 pandemic has had a significant impact globally in many areas. While primarily a health issue, it has had wide-ranging implications for stock markets, which have now rallied after the plunge in share prices in mid-March when the full severity of the emerging pandemic became more widely appreciated. Nonetheless, the FTSE 100 Index remains almost 20% off its late February 2020 figure.
Companies: AVO ARBB ARIX CLIG DNL GDR ICGT NSF PCA PIN PXC PHP RECI STX SCE TRX SHED VTA YEW
Secular stagnation refers to the economic theory that growth will be persistently low for some time to come, due to an imbalance between savings and investment. If capital is saved rather than invested productive capacity lies idle, while the drag on consumption reduces demand in the economy. As a result GDP growth is reduced. As we have previously discussed, there is no historical evidence that GDP growth has a direct impact on stock market growth – in contradiction of the theorised linkage via earnings. However, in a world of secular stagnation in which there is a glut of savings, corporate earnings will be muted as demand for companies’ wares remains sluggish, which should negatively impact stock market growth. High rates of savings would also push equity valuations higher than they would otherwise be and thereby reduce future returns. Investors can respond to this situation in a number of ways. One is to try to find active strategies, which either seek to harness certain factors likely to boost returns or to generate high stockspecific alpha. In the first case this could mean looking to harness the small cap premium or to the emerging markets which should see greater earnings growth over the long run. It could also mean looking to the tech sector, where earnings are dependent more on secular changes within the economy than the growth rate of the economy. In the second case this would mean looking for highly active stock pickers who run concentrated portfolios and aim to pick the winning companies which can steal market share from competitors. We believe the investment trust universe is the perfect place to find such strategies, as the structure allows managers to focus on managing their strategy and not inflows and outflows, while being able to take exposure to relatively illiquid assets and harvest the premium for doing so. Another way of responding is to look for alternative assets which offer comparable or superior returns to the equity market as a whole. In our view, when we look at likely equity returns over the next ten years, some alternatives look compelling. In the below we sketch a rough idea of likely equity returns over the next decade and then introduce some trusts we think have the potential to generate similar returns from more predictable cash flows and potentially less volatile NAVs.
Companies: USF HICL NESF TRIG UKW NBLS
Activity was limited by housebuilding shutdown in H1 as a result of COVID. Sigma remained profitable and, with a strong balance sheet, has weathered the storm. With yesterday’s launch of the £1bn EQT London fund, a material step change is expected for the coming financial year. We reinstate forecasts; updating for EQT and revised expectations post-COVID. We revisit our valuation: a “sum of the parts” approach, assuming no additional AuM, implies an intrinsic value of 200p/share.
Companies: Sigma Capital Group Plc
Trident Royalties Plc (AIM: TRR) has, this morning, announced the acquisition of a 1.5% Net Smelter Royalty (NSR) over the resourcestage Lake Rebecca Gold Project located in the highly prospective Eastern Goldfields province in Western Australia. The royalty package is being acquired from a private seller for a total consideration of A$8.0 million (c. US$5.63 million), comprising of A$7.0 million in cash and A$1.0 million in new ordinary shares in Trident. The acquisition is Trident’s fifth overall and its third gold deal. As per strategic guidance the company is moving fast assembling a diversified portfolio with a paying cashflow stream from iron ore and copper production and several strategic gold royalties with the potential for near term revenues. The market is paying attention with TRR shares up 49.8% since its IPO on AIM in June this year. There is clearly more to come with c. US$7.5 million of uncommitted cash as well as the potential for debt funding and the ability to use equity as acquisition consideration. The Lake Rebecca Gold Project operated and wholly owned by Apollo Consolidated (ASX: AOP), is located 150km ENE of Kalgoorlie in the Eastern Goldfields Province of the Yilgarn Craton. The Project, envisaged as a simple open pit operation, is close to existing gold infrastructure namely Saracen Mineral Holdings Limited’s (ASX: SAR) Carosue Dam Operation whose processing plant is in the process of being upgraded to increase throughput to 3.2 Mtpa.
Companies: Trident Royalties Plc
Top decile total returns continue.
Financial results. The March 2020 NAV increased by 3% to 285p, continuing the company's strong NAV record since flotation in 2016 (compound growth rate of 16% or total return CAGR of 18%). Adjusted PBT rose by 10% to £2.41m, benefiting from last August's purchase of Concorde Park in Maidenhead, partly offset by higher irrecoverable service charge costs. The final dividend of 2p gives a total of 5.3p, 16% lower than 2018/19, reflecting the Board's decision to maintain liquidity.
Investment Portfolio. 99% of the £140m portfolio is invested in regional offices, with more than 50% by income and value in business parks close to Milton Keynes, Bristol and Maidenhead most notably. We believe that high quality, well located business parks are likely to outperform in terms of rental and capital values during the COVID pandemic as tenants focus on the combination of easier transport access and the well-being of their employees.
Robust rent collection. The company has collected almost 90% of its rent roll in respect of H1/20-21, 91% in Q1 and 87% in Q2. This positive data reflects the quality of both its portfolio and its diverse tenant base. The portfolio has been individually selected, based on asset location and letting prospects, and the company's strategy is to minimise voids by letting at economic rents with minimal tenant incentives.
Forecasts. H1/20-21 has been positive in terms of rent collection but we are withholding our PBT and DPS forecasts for now. Further positive rent collection following next Tuesday's Rent Quarter day will provide additional confidence for the current year. The statement refers to the target of reducing gearing by selling assets where significant value has been added – sales at close to Savills latest valuation will provide confidence in the robustness of the NAV.
Share Valuation. The shares are trading on a 48% discount to NAV yielding 3.6%. Regional REIT and Palace Capital are peer companies which focus primarily on regional offices and both have reported NAV falls in their most recent results, yet trade on lower NAV discounts (but with higher yields and greater liquidity). Circle shares look undervalued, trading just below their IPO price despite a near doubling of NAV since early 2016.
Companies: Circle Property Plc
Hunters delivered a resilient performance in H1 and is now experiencing a very positive rebound in H2. After a strong start to the year, CV19 lockdown led to a reduction in H1 revenues of -18% to £5.4m largely due to a fall in residential sales income, with lettings and franchise income holding up well. Restructuring of the cost base and utilisation of government support resulted in EBITDA increasing +30% to £1.4m. As lockdown restrictions have eased since the period end, activity has rebounded with instructions in August up +38% y/y. Hunters benefits from a favourable geographic spread of branches and is well placed to benefit from the strong property market as, prompted by CV19, people reconsider where they wish to live. As with many industries, CV19 has accelerated technological change and Hunters expects to release its SKIPA CRM platform shortly, which should deliver material productivity benefits. We resume forecasts with PBT/EPS of £2.2m/6.2p for FY20 and introduce estimates of £2.4m/6.6p for 2021. The shares trade on 7x 2020 earnings which we view as an unwarranted discount to peers Belvoir (10.4x) and The Property Franchise Group (12.1x). Further, the anticipated reinstatement of a dividend for FY20 will see the shares yield over 6%.
Companies: Hunters Property Plc