Mercia interim results 2023 – Chief Financial Officer’s Review

Overall financial performance

Mercia has maintained positive financial momentum during the first half of the current financial year, with increases in adjusted operating profit, net assets and net assets per share.

Interim dividend

The Board adopted Mercia’s progressive dividend policy in December 2020, and since then has announced interim dividends of 0.10 pence per share in December 2020 and 0.30 pence per share in December 2021. Shareholders also approved a maiden final dividend of 0.30 pence per share in September 2021 and 0.50 pence per share in September 2022.

Given the Group’s twin sources of profitability and cash inflow, being regionally focused proactive specialist asset management, plus direct investment and periodic cash realisations, the Group’s dividend policy does not need to be anchored to one or other source of liquidity, hence the Board’s intention to grow total dividends year on year.

The continuing positive overall Group performance, coupled with its future prospects, has enabled Mercia’s Board to declare an interim dividend of 0.33 pence per share (H1 2022: 0.30 pence per share). The interim dividend will be paid on 4 January 2023 to shareholders on the register at close of business on 16 December 2022, with the total dividend payable being £1,452,000 (H1 2022: £1,320,500).

Adjusted operating profit

The Directors believe that the reporting of adjusted operating profit assists in providing a consistent measure of operating performance for businesses such as Mercia and is an important alternative performance measure (“APM”) of interest to shareholders.

Adjusted operating profit is defined as operating profit before net exceptional performance fees, realised gains on disposal of investments, fair value movements in investments, share-based payments charge, depreciation, amortisation of intangible assets, movement in fair value of deferred consideration and exceptional items. It includes net finance income.

Results reported on an APM basis are denoted by ¹ throughout this review.

	Unaudited Six months ended 30 September 2022 £’000	Unaudited Six months ended 30 September 2021 £’000	Audited Year ended 31 March 2022 £’000
Revenue	12,181	10,089	20,576
Administrative expenses	(10,102)	(7,957)	(16,618)
Net finance income	1,480	230	4,437
Adjusted operating profit1	3,559	2,362	8,395
Net exceptional performance fees	–	1,592	1,592
Adjusted operating profit1 including net performance fees	3,559	3,954	9,987
Depreciation	(120)	(110)	(224)
Net finance income	(1,480)	(230)	(4,437)
Realised gain on disposal of investment	–	–	9,878
Fair value movements in investments	5,595	8,708	11,385
Share-based payments charge	(592)	(573)	(1,109)
Amortisation of intangible assets	(1,017)	(1,017)	(2,033)
Movement in fair value of deferred consideration	–	–	(522)
Operating profit	5,945	10,732	22,925
Net finance income	1,480	230	4,437
Profit before taxation	7,425	10,962	27,362
Taxation	(422)	192	(1,262)
Profit and total comprehensive income	7,003	11,154	26,100

 

A reconciliation of these interim results prepared in accordance with International Financial Reporting Standards (“IFRS”) to those presented on an APM basis are as follows:

Six-month period ended 30 September 2022
	IFRS as reported	Performance fees	Depreciation	APM basis1
	£’000	£’000	£’000	£’000
Revenue	12,181	–	–	12,181
Administrative expenses	(10,222)	–	120	(10,102)
Depreciation	–	–	(120)	(120)

 

Six-month period ended 30 September 2021
	IFRS as reported	Performance fees	Depreciation	APM basis1
	£’000	£’000	£’000	£’000
Revenue	12,696	(2,607)	–	10,089
Administrative expenses	(9,082)	1,015	110	(7,957)
Depreciation	–	–	(110)	(110)

 

Year ended 31 March 2022
	IFRS as reported	Performance fees	Depreciation	APM basis1
	£’000	£’000	£’000	£’000
Revenue	23,183	(2,607)	–	20,576
Administrative expenses	(17,857)	1,015	224	(16,618)
Depreciation	–	–	(224)	(224)

 

Revenue

Revenue¹ increased 20.7% to £12,181,000 (H1 2022: £10,089,000) and comprised fund management related fees, initial management fees from investment rounds, investment director monitoring fees and sundry business services income. Excluding the impact of April 2022’s VCT share offer fees received during the period, the like-for-like increase was c.8%.

For the prior interim period to 30 September 2021, revenue included a £2.6million exceptional performance fee from Northern Venture Trust PLC.

Administrative expenses

Administrative expenses¹, excluding depreciation, increased 27.0% to £10,102,000 (H1 2022: £7,957,000) and comprised predominantly staff-related, office, marketing and professional adviser costs. Removing the impact of April 2022’s VCT share offer related costs, the like-for-like increase was c.11%, reflecting the post-COVID catch-up in staff recruitment together with inflation.

For the prior interim period to 30 September 2021, administrative expenses included variable compensation totalling £1.0million paid to members of Mercia’s VCT investment team, in connection with the exceptional performance fee received.

Mercia anticipates that the financial benefits of operational leverage will continue to be realised as its funds under management increase, by both its organic and inorganic initiatives.

Net finance income

Total gross finance income of £1,488,000 (H1 2022: £238,000) arose primarily from the crystallisation of convertible loan interest within the direct portfolio. Gross finance income includes £117,000 (H1 2022: £3,000) of interest received on cash deposits following Bank of England base rate rises during the period. Finance costs of £8,000 (H1 2022: £8,000) comprised interest payable on office leases and the Group’s new electric car scheme.

Fair value movements in investments

	Unaudited Six months ended 30 September 2022 £’000	Unaudited Six months ended 30 September 2021 £’000	Audited Year ended 31 March 2022 £’000
Investment movements excluding cash invested and realisations:
Unrealised gains on the revaluation of investments*	7,578	11,417	15,122
Unrealised losses on the revaluation of investments*	(1,983)	(2,709)	(3,737)
Net fair value movement	5,595	8,708	11,385

* Excluding the demerger of Netacea Limited from Intechnica Holdings Limited in the period

Net fair value increases during the period totalled £5,595,000 (H1 2022: £8,708,000) and as at 30 September 2022, the fair value of the Group’s direct investment portfolio was £131,545,000 (H1 2022: £110,298,000; FY 2022: £119,558,000).

For the period as a whole, unrealised fair value gains arose in four* (H1 2022: eight) of the Group’s direct investments. The largest fair value gain was in respect of VirtTrade Limited, which accounted for £4,003,000 of the total (H1 2022: £5,756,000 fair value gain in respect of Faradion Limited).

There were three* (H1 2022: two) fair value decreases, the largest being £883,000 which arose in respect of Edge Case Games Limited (H1 2022: £2,448,000 fair value decrease in MyHealthChecked PLC).

Share-based payments charge

The £592,000 non-cash charge (H1 2022: £573,000) arises from the net increase in the total number of issued share options held by all employees throughout the Group, ranging from 28 January 2020 to 30 September 2022.

Amortisation of intangible assets

The amortisation charge for the period of £1,017,000 (H1 2022: £1,017,000) represents amortisation of the acquired intangible assets of the VCT fund management business.

Taxation

The components of the Group’s tax charge are shown in note 9. The overall tax charge for the period comprises a corporation tax charge on taxable profits, offset by the continued unwinding of the deferred tax liability in respect of the intangible assets arising on the acquisition of the VCT fund management business.

Profit and total comprehensive income for the period

The adjusted operating profit and net fair value increases for the period contributed positively to a consolidated total comprehensive income of £7,003,000 (H1 2022: £11,154,000). This has resulted in basic earnings per Ordinary share of 1.59 pence (H1 2022: 2.53 pence).

Summarised statement of financial position and cash flows

	Unaudited As at 30 September 2022 £’000	Unaudited As at 30 September 2021 £’000	Audited As at 31 March 2022 £’000
Goodwill and intangible assets	31,338	33,371	32,355
Direct investment portfolio	131,545	110,298	119,558
Other non-current assets, trade and other receivables	1,626	5,077	1,604
Cash and short-term liquidity investments	56,112	52,114	61,284
Total assets	220,621	200,860	214,801
Trade and other payables	(8,092)	(6,805)	(7,415)
Deferred consideration	(2,869)	(4,447)	(2,869)
Deferred taxation	(3,676)	(3,180)	(3,928)
Total liabilities	(14,637)	(14,432)	(14,212)
Net assets	205,984	186,428	200,589
Net assets per share (pence) **	46.8p	42.4p	45.6p

 

** 440,109,707 Ordinary shares were in issue during the six-month period ended 30 September 2022 and 30 September 2021, and the year ended 31 March 2022

Net assets per share increased by c.3% during the interim period, notwithstanding the recognition of dividends totalling £2,200,000 paid after the period end (H1 2022: c.6% growth after recognising dividends of £1,320,500, paid after that period end).

Intangible assets

The Group’s intangible assets consist of goodwill and the intangible asset recognised on the acquisition of the VCT fund management business.

Direct investment portfolio

During the period, Mercia’s direct investment portfolio grew from £119,558,000 as at 1 April 2022 (H1 2022: £96,220,000 as at 1 April 2021) to £131,545,000 as at 30 September 2022 (H1 2022: £110,298,000 as at 30 September 2021), a c.10% increase (H1 2022: c.15% increase).

The Group invested £6,403,000 net (H1 2022: £5,370,000) into five existing and one new direct investment, Uniphy Limited (H1 2022: five existing and no new direct investments), with the top 20 direct investments representing 97.4% of the total direct investment portfolio value (H1 2022: 98.5%; FY 2022: 98.6%).

Cash and short-term liquidity investments

At the period end, Mercia had cash and short-term liquidity investments (which is cash on deposit with maturities of between 32 days and three months) totalling £56,112,000 (H1 2022: £52,114,000; FY 2022: £61,284,000), comprising cash of £50,864,000 (H1 2022: £51,880,000; FY 2022: £56,049,000) and short-term liquidity investments of £5,248,000 (H1 2022: £234,000; FY 2022: £5,235,000).

The Group continues to have limited working capital needs due to the nature of its business and during the six-month period generated operating cash inflow of £0.5million (H1 2022: £2.6million inflow).

The overriding emphasis of the Group’s treasury policy remains the preservation of its shareholders’ cash for investment, corporate and working capital purposes, not yield. As at 30 September 2022, the Group’s cash and short-term liquidity investments were spread across four leading United Kingdom banks.

The summarised movements in the Group’s cash and short-term liquidity investments during the period are shown below.

	Unaudited Six months ended 30 September 2022 £’000	Unaudited Six months ended 30 September 2021 £’000	Audited Year ended 31 March 2022 £’000
Opening cash and short-term liquidity investments	61,284	54,725	54,725
Cash generated from operating activities	544	2,625	9,150
Corporation tax paid	(705)	–	–
Net cash (used in)/generated from direct investment activities	(5,021)	(5,135)	2,363
Purchase of VCT fund management contracts (deferred consideration)	–	–	(2,100)
Cash inflow/(outflow) from other investing activities	97	(31)	(62)
Net cash used in financing activities	(87)	(70)	(2,792)
Closing cash and short-term liquidity investments	56,112	52,114	61,284

 

Outlook

Investing in young technology businesses or lending to more established SMEs is rarely a linear journey at times of economic instability, such as now. During such times, the continuing availability of cash to those businesses provides the ‘oxygen’ that they need to execute their long-term growth plans, uninterrupted by near-term cash crunches. As a direct consequence of the significant liquidity held in both our funds under management and on our own balance sheet, Mercia is able to continue to support those businesses without hindering both pillars of its own organic and inorganic growth strategy.

Having successfully grown revenues, profits, cash and NAV per share during the pandemic, Mercia is now navigating this period of significant economic and geopolitical uncertainty, elevated inflation and a downturn in sentiment towards the tech sector, from the fortunate position of debt-free strength.

The Group’s excellent staff, supportive stakeholders, strong liquidity, increasing funds under management and growing direct investment portfolio, should enable the Group to remain on track with its Mercia ‘20:20’ strategy through to 31 March 2024.

Read the full RNS here