Mercia: it won’t take long to see who's right
Fund management flying along, EBITDA +37%. Share price heavily discounts on-balance-sheet investments. Mercia intends to sell most of them within 2 years. We'll soon know who's right about value.
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Today, my Equity Development research note was published covering Mercia Asset Management’s FY25 results.
Here’s the video summary.
A year ago, the Mercia 27 strategy was announced, which prioritised scaling the highly profitable fund management business. Mercia is flying along. Funds managed for 3rd parties increased 10% y-o-y to £1.8bn and is up 46% over 2 years. Its net inflow rate has been the highest among London-listed peers for two years now.
This has filtered through to operational leverage with EBITDA jumping 37% to £7.6m.
Much of FY25 FUM growth came from inflows in Q4 so the revenue benefit is still to come. Our fundamental value increases.
This is the key message from the research note. That Mercia shares look mispriced on a fundamentals basis. We value it on a sum-of-the-parts:
First, the NAV of its on balance sheet investments translates to 29p per share - over 90% of its market cap. Mercia intends to sell c70% these over the next few years. So it won’t take long to see if the huge discount to NAV the share price implies is correct. Given Mercia’s track record of exiting at a premium to NAV, we suspect the discount is unjustified.
Second, add £40m of cash (9p per share);
Third, add the fund management business, which as I said is flying along (18p per share).
That gives 56p per share, nearly double the current share price (31.5p when the research note was published).
Read the full research note here, do your own research as well, and make up your own mind.
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Disclosure: At the time of writing, Paul Bryant was a shareholder in Mercia Asset Management and covered it as an analyst on behalf of Equity Development Limited. Read Equity Development’s research on Mercia here. And please read this link for the terms and conditions of reading Equity Development’s research.
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