Mercia Asset Management - Embedded value despite COVID-19 impact

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.