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…

Unlock the rest of this article with a 14 day trial

Already have an account?
Login here