Mercia takes the fair value gains

Mercia Asset Management (MERC) would have been hard pressed to put in a bad half-year performance after market conditions helped float the fair value of its various direct venture investments. The asset manager, which has partnerships with 19 universities and regional offices around the country, has been a beneficiary of the UK government’s rediscovered appetite for direct investment. Since its half year-end, Mercia has received £26m in disbursements from the government’s pet Northern Powerhouse Investment funds to funnel towards potential venture capital projects.

Aside from this state largesse, the asset manager currently has around £948m of assets under management and intends to maintain its target of increasing that pile by 20 per cent annually. Around £601m of that total comprises Mercia’s venture capital funds – from which Mercia invested £55m into 74 businesses during the half.

In keeping with sector trends, Mercia also booked a fair quantity of performance fees, £2.6m in these results compared with nil last time, as a reward for the NAV increase at one of its advised venture trusts. Overall, the increase in fair value came to £8.7m, with the asset manager about half the way towards achieving its goal of generating annual pre-tax profits of £20m.

Like most venture capital companies, valuing Mercia’s underlying business is more of an art than a science. House broker Cannacord Genuity has had a go with a forecast of £4.4m operating profit in 2022, without the benefit of further fair value gains. Overall, that gives an EPS runway of 0.81p, falling to 0.62p in 2023, before recovering to 0.97p in 2024, translating into a price/earnings ratio sweep of 46, 59 and 38, respectively. Hold.

Last IC View: Buy, 30.5p, 4 Dec 2018