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).
Mercia achieved its first positive net revenues in FY20, delivering revenues of £12.75m (FY19: £10.68m) against admin expenses of £12.66m (FY19: £12.12m), to deliver net revenues of £0.1m (FY19: loss of £1.4m). Mercia reported FY20 net assets of £141.5m (FY19: £126.1m), despite the direct investment portfolio falling marginally to £87.5m (FY19: £87.7m); the impact on valuations from COVID-19 more than offset the net £15.7m invested in 18 portfolio companies. Accordingly, hard NAV (portfolio fair value + net cash) was broadly flat, up 0.2% to £117.7m (£117.4m). FUM rose by 73% to £658m (FY19: £381m).
The acquisition of the NVM VCT fund management business (NVM) in December 2019, together with £38.2m of new capital raised by NVM in April, supplemented by a further £54.3m from the BBB and £10m of EIS capital, means that FUM rose to c £658m and AUM to c £800m. The NVM acquisition was transformative in that the additional revenue (from fund management-related fees of c 2%) means that Mercia is now profitable on an ongoing operational basis, starting to deliver on management’s three-year strategic plan to put Mercia on a sustainable footing.
Mercia’s shares continue to trade at a discount to NAV (0.60x), even before considering the embedded value of Mercia Fund Managers (MFM), which we estimate could be worth an additional 4.5p per share or more on top of NAV. Catalysts for a re-rating include further scaling of the business, commercialisation of the direct investment portfolio and/or successful exits.