Mercia preliminary results FY2024 – CFO’s review

Strong progress

Overall financial performance

Notwithstanding the inflationary challenges affecting the UK economy in general and more specifically the financial services sector during Mercia’s financial year to 31 March 2024, the Group was able to increase its EBITDA compared with the prior year. This was due in part to the continuing positive performance of FDC.

A significant increase in bank interest receivable has also enabled the Group to report a higher adjusted operating profit than the prior year.

Proposed final dividend

The Board adopted Mercia’s progressive dividend policy in December 2020 and since then has declared and paid interim and final dividends totalling 2.41 pence per share, equating to dividend payments to shareholders of £10.7million.

Given the Group’s twin sources of profitability and cash inflow, being regionally focused proactive specialist asset management, plus direct investment with 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 continuing intention to grow total dividends year on year.

The continuing positive overall trajectory of the Group has enabled Mercia’s Board to recommend a proposed final dividend of 0.55 pence per share (2023: 0.53 pence per share). If approved by shareholders at the Annual General Meeting in September 2024, the total dividend for the year will be 0.90 pence per share (2023: 0.86 pence per share), a year-on-year increase of c.5% (2023: increase of 7.5%).

If approved by shareholders, the final dividend will be paid on 1 November 2024 to shareholders on the register at the close of business on 4 October 2024.

Share buyback

Although recent share buybacks in the specialist asset management sector have done little to positively affect share price performance (if at all) and a resultant reduction in discounts to net asset value, Mercia has always said that if it enjoyed a significant cash realisation it would consider how best to distribute a proportion of those proceeds to shareholders. Mercia’s realisation of its direct investment in nDreams Limited in November 2023, significantly increased the Group’s cash position. Given that the Group also has no debt, Mercia announced an up to £5.0million share buyback programme at the time of its interim results at the end of November 2023. As at 31 March 2024, Mercia had bought back 10,379,708 shares into Treasury at an average overall cost per share of 30.8p, and at a total cost of £3,194,000. The buyback concluded on 29 May 2024, with 15,706,088 shares bought back in total at an average price of 31.8 pence per share.

Alternative performance measures (“APM”)

The Directors believe that the reporting of both EBITDA and adjusted operating profit assist in providing insightful measures of operating performance for businesses such as Mercia and are APMs of interest to both current and potential shareholders.

EBITDA is defined as operating (loss)/profit before exceptional item, depreciation, realised gains/(losses) on the sale of direct investments, fair value movement in direct investments, share-based payments charge, amortisation of intangible assets and movement in fair value of deferred consideration.

Adjusted operating profit is defined as EBITDA plus net finance income.

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

Year ended

31 March

2024

£’000

Year ended

31 March

2023

£’000

Revenue 30,434 25,881
Administrative expenses (24,897) (20,692)
EBITDA1 5,537 5,189
Net finance income 4,160 2,397
Adjusted operating profit1 9,697 7,586
Depreciation (489) (309)
Net finance income (4,160) (2,397)
Realised gain/(loss) on sale of direct investments 4,450 (849)
Fair value movement in direct investments (17,338) 1,201
Share-based payments charge (1,002) (1,049)
Amortisation of intangible assets (2,989) (2,337)
Movement in fair value of deferred consideration (540) (1,462)
Operating (loss)/profit before exceptional item (12,371) 384
Exceptional item (372)
Operating (loss)/profit (12,371) 12
Net finance income 4,160 2,397
(Loss)/profit before taxation (8,211) 2,409
Taxation 626 427
(Loss)/profit and total comprehensive (expense)/income (7,585) 2,836

 

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

   
  Year ended 31 March 2024
  IFRS as reported

£’000

Depreciation

£’000

APM basis1

£’000

Administrative expenses (25,386) 489 (24,897)
Depreciation (489) (489)

 

  Year ended 31 March 2023
  IFRS as reported Depreciation APM basis1
  £’000 £’000 £’000
Administrative expenses (21,001) 309 (20,692)
Depreciation (309) (309)

 

Revenue

Revenue increased 17.6% to £30,434,000 (2023: £25,881,000) and comprised fund management related fees, initial management fees from investment rounds, arrangement fees from loans, investment director monitoring fees, sundry business services income and VCT share offer fees.

Administrative expenses1

Administrative expenses, excluding depreciation, increased 20.3% to £24,897,000 (2023: £20,692,000) and comprised predominantly staff-related, office, marketing, professional adviser and VCT share offer-related costs.

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

EBITDA

EBITDA increased 6.7% to £5,537,000 (2023: £5,189,000), equating to an EBITDA margin of 18.2% (2023: 20.0%). The Group has therefore largely been able to offset the inflationary impact during the financial year on its cost base.

Net finance income

Total gross finance income of £4,216,000 (2023: £2,428,000) arose largely from a material increase in interest receivable on cash deposits (as shown in note 8 of the summary financial information) following Bank of England base rate increases during the year, together with the crystallisation of convertible loan interest within the direct investment portfolio. Finance costs of £56,000 (2023: £31,000) comprised interest payable on office leases and the Group’s staff electric car scheme.

Fair value movement in direct investments

Year ended

31 March

2024

£’000

Year ended

31 March

2023

£’000

Investment movements excluding cash invested and realisations:
Unrealised gains on the revaluation of direct investments* 7,877 11,324
Unrealised losses on the revaluation of direct investments* (25,215) (10,123)
Net unrealised fair value movements (17,338) 1,201

* Excluding the impact of the demerger of Netacea Limited from Intechnica Holdings Limited in the year ended 31 March 2023.

 

The net unrealised fair value movement in direct investments resulted in a £17,338,000 decrease (2023: £1,201,000 increase) and as at 31 March 2024, the fair value of the Group’s direct investment portfolio was £116,861,000 (2023: £136,550,000).

Unrealised fair value gains arose in 10 (2023: five*) of the Group’s direct investments. The largest unrealised fair value gain was in respect of Voxpopme Limited, which accounted for £3,973,000 of the total (2023: £4,145,000 unrealised fair value gain in respect of VirtTrade Limited).

There were eight (2023: six*) unrealised fair value decreases, the largest being £18,558,000 which arose in respect of Impression Technologies (2023: £3,511,000 unrealised fair value decrease in Netacea Group). As more fully set out in the Chief Investment Officer’s review, Mercia ceased further material investment into Impression Technologies in May 2024, resulting in the full impairment of the Group’s direct investment fair value as at 31 March 2024.

Share-based payments charge

The £1,002,000 non-cash charge (2023: £1,049,000) arises from the total number of issued and vested share options held by employees throughout the Group, ranging from 28 January 2020 to 31 March 2024.

Amortisation of intangible assets

The amortisation charge for the period of £2,989,000 (2023: £2,337,000) represents amortisation of the acquired intangible assets of FDC and the VCT fund management business.

Movement in fair value of deferred consideration

The purchase price of FDC in December 2022 included an element of contingent deferred consideration which is subject to a number of targets being met. Movement in the fair value of this contingent deferred consideration during the year to 31 March 2024 has resulted in a charge to the consolidated statement of comprehensive income of £540,000 (2023: £131,000).

In the prior year to 31 March 2023, a charge to the consolidated statement of comprehensive income of £1,331,000 represented the unwinding of the discount on the final deferred consideration payment relating to the acquisition of the VCT fund management business in December 2019. This was settled in cash in December 2022 and new Mercia Asset Management PLC Ordinary shares issued in January 2023.

Taxation

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

Loss and total comprehensive expense for the year

The adjusted operating profit plus the realised gain, less the net unrealised fair value decrease for the year and other non-cash charges, led to a consolidated total comprehensive expense of £7,585,000 (2023: income of £2,836,000). This has resulted in a basic loss per Ordinary share of (1.71) pence (2023: basic earnings per Ordinary share of 0.64 pence).

Summarised statement of financial position

As at

31 March

2024

£’000

As at

31 March

2023

£’000

Goodwill and intangible assets 36,296 39,285
Direct investment portfolio 116,861 136,550
Other non-current assets, trade and other receivables 4,810 4,751
Cash and cash equivalents 46,940 37,834
Total assets 204,907 218,420
Trade, other payables and lease liabilities (9,595) (7,720)
Deferred consideration (2,279) (3,239)
Deferred taxation (3,792) (4,540)
Total liabilities (15,666) (15,499)
Net assets 189,241 202,921
Net assets per share (pence) ** 43.4p 45.4p

 

** 436,319,815 Ordinary shares, excluding those held in treasury, has been used as the denominator for calculating net assets per share as at 31 March 2024. 446,581,202 Ordinary shares were in issue as at 31 March 2023 and therefore used as the denominator for calculating the comparative net assets per share.

Intangible assets

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

Direct investment portfolio

During the year, Mercia’s direct investment portfolio reduced from £136,550,000 as at 1 April 2023 (2023: £119,558,000 as at 1 April 2022) to £116,861,000 as at 31 March 2024 (2023: £136,550,000 as at 31 March 2023), a c.14% decrease (2023: c.14% increase).

The Group invested £19,626,000 net (2023: £20,653,000 net) into 11 existing direct investments (2023: 10 existing and three new direct investments), with the top 20 direct investments representing 98.6% of the total direct investment portfolio value (2023: 98.4%).

Cash, cash equivalents and short-term liquidity investments

At the year end, Mercia had cash and cash equivalents totalling £46,940,000 (2023: £37,834,000).

The Group continues to have limited working capital needs due to the nature of its business and during the year cash generated from operating activities totalled £7,872,000 (2023: £3,019,000).

As at 31 March 2024, the Group’s cash and cash equivalents were spread across four leading United Kingdom banks and a BlackRock Sterling money market fund, earning an average overall yield of c.5%.

The summarised movements in the Group’s cash and cash equivalents during the year are shown below.

Year ended

31 March

2024

£’000

Year ended

31 March

2023

£’000

Opening cash and cash equivalents 37,555 56,049
Cash generated from operating activities 7,872 3,019
Corporation tax paid (788) (1,819)
Net cash generated from/(used in) direct investment activities 9,360 (14,930)
Acquisition of Frontier Development Capital Limited (6,951)
Cash acquired with Frontier Development Capital Limited 2,882
Deferred consideration paid in respect of acquisitions (1,500) (2,100)
Cash inflow from other investing activities 1,991 5,327
Repurchase of own shares into treasury (3,194)
Net cash used in financing activities (4,356) (3,922)
Closing cash and cash equivalents 46,940 37,555

 

Outlook

Once again, these results demonstrate Mercia’s robust business fundamentals, despite the significant salary and general inflation experienced in the asset management sector during the financial year, and the impact of its decision to cease further investment into Impression Technologies.

Set against another year of subdued inflows by the asset management sector, Mercia achieved record fund inflows of c.£562million during the year and increased revenues, EBITDA, adjusted operating profit, dividends and cash.

Whilst always keeping a careful eye on the horizon, Mercia’s cautious optimism at the time of its interim results in November 2023 has been borne out by significant new fund mandate wins and successful VCT and EIS fundraises. Taken together, they point to the potential for further positive progress in the current financial year.

With new long-term fund management contracts secured, Mercia has never been financially stronger and for this we remain grateful to our excellent staff for their continuing efforts and our many long-term supportive fund investors and shareholders.

Martin Glanfield

Chief Financial Officer