Lo -Q Final results

Leisure industry tech leader Technology

FY12 numbers are broadly in line with our forecasts. More importantly, after the 12 February 2013 purchase of accesso for $22m in December, Lo-Q has now significantly expanded its Price 442.5p range of growth drivers. In our view, the group’s mobile phone product offerings are Market cap £86m well positioned to benefit from 4G/LTE ultra-broadband smart phones. Seven of the world’s 10 largest theme park operators are customers, with six using the group’s Shares in issue 19.3m patented virtual queuing solutions and four taking its e-commerce products. The Free float 74% accesso deal brings significant cross-selling opportunities and management is Code LOQ Pro forma net cash (£m) 1.0 seeking to accelerate growth, both geographically and across new verticals. Primary exchange AIM Other exchanges N/A

Year end Revenue PBT* EPS* DPS P/E Yield (£m) (£m) (p) (p) (x) (%) Share price performance 10/11 24.5 2.8 12.1 0.0 36.5 N/A 10/12 29.1 3.2 15.0 0.0 29.4 N/A 10/13e 38.3 4.5 16.7 0.0 26.4 N/A 10/14e 40.6 5.0 18.4 0.0 24.1 N/A *PBT and EPS are normalised, excluding amortisation of acquired intangible, exceptional items and share-based payments.

Investment case: One-stop shop for operators

The group’s virtual queuing solutions, which are operated on a revenue-share basis, will be available in 22 theme parks globally and 14 North American water parks during % 1m 3m 12m the 2013 season. Following the acquisition of accesso in December, Lo-Q can now Abs 11.7 31.1 89.5 Rel (local) 8.7 19.8 73.7 offer its customers a solution, covering payment, ticketing, queue line management 52-week high/low 442.50p 249.0p and digital content. The accesso deal widens the group’s customer base across a range of new verticals and significantly boosts Lo-Q’s presence in North America. Business description Accesso’s ticketing and payments solutions provide strong recurring revenues with Lo-Q provides technology solutions to the their transaction-based business models. We see further upside from extending leisure and attractions industry. Its solutions accesso’s products to Lo-Q’s customer base outside the US and through utilising include payment, ticketing, queue line management and digital content. accesso’s strengths to leverage the distribution of Lo-Q’s products in North America.

Final results: EPS is a penny ahead of expectations Next events FY12 revenue increased 18.7% to £29.1m. This is slightly below our £30.4m forecast AGM March 2013 due to the proportion of fully recognised rental revenues in the revenue mix and poor Interim results June 2013 Trading update November 2013 weather conditions. Operating margin, at 10.9%, was a touch higher than our forecast even in spite of lower-than-expected development cost capitalisation, while EPS at Analysts 15.0p was 1.0p ahead of our forecasts, helped by a lower-than-expected tax charge. Richard Jeans +44 (0)20 3077 5700 Dan Ridsdale +44 (0)20 3077 5729 Net cash of £8.9m was £0.4m better than we had modelled. Accesso was purchased [email protected] after the end of the period for c $22m, including £5.9m in shares along with £7.9m Edison profile page cash and loan notes, which reduces the year-end pro forma net cash to £1.0m.

Forecast and valuation: Attractive given the prospects We are easing our FY13 and FY14 revenue forecasts, modelling in a higher mix of higher-margin “proportionate rental” revenues. Our adjusted operating profit remains at similar levels, while EPS rises to 16.7p and 18.4p from 16.3p and 17.6p respectively. While the shares trade on a punchy rating of c 26x our FY13 earnings falling to c 24x in FY14, the group has established an excellent track record and has plenty of momentum along with a clear strategy in place to sustain its growth.

Lo-Q is a research client of Edison Investment Research Limited

Lo-Q | 12 February 2013

Investment summary: Leisure industry tech leader

Company description: Queuing and e-commerce solutions Lo-Q is a technology provider to operators of theme parks and other attractions. Its products cover electronic virtual queuing, reservation and guest service systems along with cloud-computing-based ticketing and e-commerce solutions tailored for onsite, the internet and mobile phones. The group has c 105 full-time employees working in operations, R&D, sales and administration, along with c 850 seasonal employees, who work in parks. The head office and European support teams are based in Twyford, Berkshire, in the UK and the group has US offices in Lithia Springs, Georgia, and in Lake Mary, Florida, to support its North American customer base. R&D teams are in Twyford and Lake Mary.

Financials: Lucrative revenue-sharing and transaction-based models Lo-Q’s traditional virtual queuing business generates its income through revenue-sharing arrangements with park and attractions operators, while its ticketing and payments solutions operate transaction- based business models. The group has been profitable since FY06, generated positive operating cash flow since FY07 and positive free cash flows since FY08. On our forecasts, the group will generate free cash flow of £1.5m in FY13, rising to £2.7m in FY14 and to £4.0m in FY15 and we forecast net cash to rise to £2.6m as at 31 October 2013, rising to £5.3m by October 2014 and £9.4m a year later.

Exhibit 1: Group revenues and operating margins since 2001 50 20%

40 15% 30 10%

£m 20 10 5% 0 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2014e 2015e 2013e Revenues Operating profit margin

Source: Lo-Q accounts (historics), Edison Investment Research (forecasts)

Sensitivities: Strength of the intellectual property Virtual queuing is potentially sensitive to an economic slowdown as a weak economic backdrop might shorten the lengths of queues and reduce the requirement for priority systems. Theme and water parks have short seasons; if interrupted by poor weather, or other factors, our forecasts could be affected. A significant proportion of revenues are concentrated through , a large US theme park chain. Technological developments such as mobile phone apps could pose a threat, although the combination with accesso arguably strengthens Lo-Q’s competitive position, and the group continues to invest in its patent portfolio covering wireless devices, including mobile phones, and virtual queuing.

Valuation: Stable earnings base with a range of growth prospects The stock trades on 26x our FY13 earnings, falling to 24x in FY14 and to 20x in FY15. Our DCF model (which assumes a WACC of 10%) values the shares at 468p, or 6% above the current share price. In our view, this valuation is underpinned by the group’s record of cash generation, its largely recurring revenue streams, its long-term relationship with Six Flags, its growing business with other major park operators and the potential to leverage accesso’s business outside the US. We see significant further upside potential from a stronger sales focus and growth opportunities in adjacent markets.

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Final results: Established parks continue to grow

Group revenue grew by 19% to £29.1m. The gross margin slipped by 1.9% to 23.4%, reflecting the greater proportion of lower-margin fully recognised revenues following the roll-out of the Q-band at the Six Flags water parks. Lo-Q recognises the full revenues in the parks where it is the operator and runs the workforce, with the park operator’s proportion treated in cost of sales; in other parks, it will only recognise its proportionate share of the revenues. Adjusted operating profit grew 15% to £3.2m, while EPS jumped by 24% to 15p, aided by a smaller-than-expected tax charge. The group’s strong performance was in spite of the extreme weather conditions, which included the wettest summer since records began in the UK and much of Europe and the hottest July since records began in North America. Furthermore, Hurricane Sandy impaired trading on the east coast of North America in the key final weekend of October, which is characterised by the Fright Fest celebrations.

Revenues and profits. Lo-Q reported a 12.6% like-for-like, year-on-year increase in average guest spend on its products in FY12, along with a 9.0% increase in the number of park attendees using its system. These data support our earlier view that the North American theme parks were the main driver of the business in FY12. We also believe the three European parks rolled out in FY11 would have contributed more significantly in FY12. As we have highlighted previously, new parks take some time to build revenues and likewise we feel the parks rolled out in FY12 would have made only modest contributions, excluding the Six Flags water parks due to the product awareness at Six Flags.

While revenue of £29.1m was slightly below our forecast of £30.4m, this was due to a lower-than- expected proportion of fully recognised rental revenues in the revenue mix and poor weather conditions. As fully recognised revenues are lower margin revenues, the flow through to profits was relatively small. In fact, adjusted operating profit, when reversing out the net capitalisation of development costs, was £0.3m ahead of our forecast, reflecting lower-than-expected operating costs. After including net capitalisation of development costs, the adjusted operating profit at £3.2m was £0.1m below our forecast.

Investment in technology. FY12 research and development expenditure was £0.85m (FY11: £0.65m), of which 48% was capitalised. (FY11: 49%). A further £42k was invested in intellectual property rights.

Cash flow. Operating cash flow before tax surged 41% to £4.1m. After tax (£0.8m), development costs (£0.4m), modest patent costs, investment in fixed assets (£1.6m), which was boosted by the roll-outs, and modest net interest received, free cash flow was a touch lower at £1.3m.

New contract wins Water parks. Since the launch of the Q-band in November 2011, the group has now signed up 14 new park customers (see Exhibit 2), the top three of which will be rolled out for the 2013 season.

Exhibit 2: Water park customers Estimated Announced Water park Ownership Term attendees 06/02/2013 Camelbeach Mountain Waterpark Camelback Mountain Resort Five years 370,000 22/01/2013 Dollywood’s Splash Country Herschend Family Ent Three years 350,000 08/01/2013 Palace Ent () Undiscl 471,000 01/03/2012 Zoombezi Bay Columbus Zoo and Aquarium Five years 374,000 31/01/2012 Hurricane Harbor Magic Mountain Six Flags Six years 300,000 18/01/2012 Palace Ent (Parques Reunidos) undiscl 432,000 12/11/2011 Seven additional water parks Six Flags Six years 2,800,000 22/06/2011 Six Flags White Water Atlanta Six Flags Six years 500,000 Total 5,597,000 Source: Company announcements, Themed Entertainment Association, Edison Investment Research

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Universal Studios. At the interims last June, we pointed out the well-substantiated press reports that Universal Studios was trialling the Q-bot system at Universal Orlando’s Islands of Adventure. The Q- bot, which has been branded “Universal Ride Reservation System”, is now also in operation at Universal Studios Florida. The two parks are co-located at Universal Orlando Resort and according to the Themed Entertainment Association (TEA), Universal Studios had 6.044m attendees in 2011, while Islands of Adventure had 7.674m. While Lo-Q has still not formally announced Universal as a customer, there has been wide discussion on the internet, including detailed information on the product.

It is also clear that the Q-bot system is running alongside Universal’s existing paper-based system “Express Pass”. Our understanding is that the Q-bot has not previously operated alongside an existing system. Universal has two classes of Express Pass – a front-of-line, once-a-day version and a front-of- line anytime version. Both these passes enable the holder to go straight to the front of the queue for the attraction of their choice. The Universal Ride Reservation System is a regular version of the Q-bot, enabling the user to wait in a virtual queue, albeit for the same time as those in the physical queue, and the pricing is below Universals’ products. Therefore, it appears to us that Universal has decided there is a market for Lo-Q’s product that will not cannibalise its existing products, and that the people the Q-bot removes from physical queues will be able to enjoy their time elsewhere in the park, and will have the opportunity to spend their money (on food and beverages, games, souvenirs, etc) as they wait.

Universal is the world’s third-largest theme park operator in terms of numbers of annual attendees and is regarded by many as the most prestigious operator in the industry. It has theme parks in Florida, Hollywood, Singapore and Japan. Plans for theme parks in several other countries have been announced including in South Korea and Russia.

First Q-smart deal. In October, Walibi Holland theme park, part of Compagnie des Alpes, became Lo-Q’s first Q-smart customer. The three-year deal followed a successful trial of the smart phone- based queuing system at a North American theme park over the summer. This is the first test of the Q- smart on a standalone basis, as the North American theme park where the summer trial was held also has a Q-bot offering. Compagnie des Alpes, a new customer, operates 36 sites, including 15 major ski resorts in the Alps (including Tignes, Val d’Isère, Les Arcs, La Plagne, Les Menuires, Les 2 Alpes, Meribel and Chamonix) and 21 leisure parks (including Parc Asterix, Grévin and Walibi) in six European countries (France, Switzerland, the Netherlands, Belgium, Germany and the UK).

Other contract news. In January 2013, it was announced that Lo-Q’s contract with Dollywood has been extended by two years to 2015. Dollywood, which is part of Herschend Entertainment, has more than two million annual attendees and has been a Q-bot customer since 2007. Also in January, it was announced that Noah’s Ark, part of , had begun utilising accesso Passport’s e- commerce product. Noah’s Ark had 643,000 attendees in 2011, according to TEA.

Targeting Asia. In September, Lo-Q signed a partnership agreement with Sanderson Group, an Australian company specialising in the design and construction of themed attractions, to spearhead the group’s expansion into the fast-growing Asian markets. We note the top 20 parks in Asia increased their combined attendance by 9.4% in 2011 according to TEA. The partnership will see both firms collaborate on the promotion, sale and support of Lo-Q’s products in the region. The project began in November 2012 for an initial one-year period with an option to convert into a formal joint venture arrangement in November 2013 or before. With the contract-signing season currently out of season in the southern hemisphere, where it is currently summer, we would expect possible announcements in the northern hemisphere summer months.

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Acquisition of accesso In December, Lo-Q acquired accesso from its CEO, Steven Brown, for $22m. We believe a major reason for Mr Brown wishing to combine accesso with Lo-Q was because accesso was entirely US- focused and needed an avenue to grow internationally and Lo-Q provided a perfect fit to achieve this objective. Mr Brown, who spent 16 years with Walt Disney where he held executive positions as director of Walt Disney World Ticketing and VP of revenue management for Disneyland Resort, has joined the Lo-Q board and is now running the group’s North American businesses.

Accesso has grown strongly since it was set up in 2008, expanding from five customers with 29 venues in that year to 29 customers with 106 venues in 2012 and has established a 36% market share in US theme parks. Accesso generated revenue of $5.65m in the year to December 2011, of which the bulk was in ticketing, and most revenues are generated over the summer months. During 2012, the growth was c 40% after the company more than doubled its customer base in 2011, which includes major theme park operators Cedar Fair Entertainment, Palace Entertainment (owned by Parques Reunidos) and Herschend Family Entertainment. Accesso also has customers in other verticals including zoos, motor racing and single-line attractions such as Seattle’s iconic Space Needle.

Benefits of the acquisition We highlight the following points:

 People. Lo-Q was particularly attracted by the strong management team at accesso and what Lo- Q describes as an “outstanding team of people”. Clearly, it believes there a strong cultural fit. Interestingly, Mr Brown, Janel Pisorchik, VP of business operations, and TJ Christensen, VP of business development, all have backgrounds that include Walt Disney Parks and Resorts. Mr Brown also served as an executive for Six Flags. Furthermore, accesso has a highly skilled team of software engineers and operations team members that are experts in the attractions space.

 Product differentiation. Lo-Q believes accesso is ahead of the curve, given its experience in the delivery of cloud services, while its main competitors are struggling to adapt their traditional business models to the cloud. We note that cloud solutions are highly scalable, easy to implement and enable the vendor to provide regular updates seamlessly over the internet.

 Customer relationships. Lo-Q believes the acquisition will deepen its customer relationships, particularly with important “top 10” theme and water park operators. We note that being based near Orlando, Florida, could be particularly helpful in building relationships with the large local theme parks. We also note accesso has a strong customer services culture.

 Synergies. There are clearly strong benefits to be had in offering multiple solutions, especially given the premise of industry convergence to mobile-based solutions.

Product set: Queuing and e-commerce solutions

Lo-Q designs, installs and operates systems that allow members of the public to make ride and show reservations when they visit a theme park or another attraction. Lo-Q’s flagship product, VQ2020 is a virtual queuing system delivered through Lo-Q’s proprietary hand-held devices, called Q-bots. Q-bots are used in major theme parks and are either own-branded, eg at Legoland Windsor, or white-labelled, such as at Six Flags (The Flash Pass), Dollywood (Q2Q), Dreamworld Australia (Q4U), Blackpool Pleasure Beach (Speedy Pass) and Universal Studios (Universal Rider Reservation System).

Q-bot. The Q-bot operates as a virtual place holder, allowing users to avoid standing in lengthy queues. It is a small, ruggedised, hand-held device designed specifically for a theme park environment. The Q-bot has a carabineer clip to fasten, for example, to a belt – an important function when a user is enjoying a roller-coaster ride. The product was launched at IAAPA, the theme park

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trade show, in 2000 and updated in 2006 with improved functionality (VQ2020), which includes ZigBee- based proprietary wireless technology that enables users to book rides directly from the device.

Q-smart. The Q-smart is a smartphone app with similar functionality to the Q-bot and the user is sent a QR code to scan when joining a ride. The first contract was signed in October with Walibi Holland, part of Compagnie des Alpes, and Lo-Q expects to eventually run it alongside the Q-bot in the parks of its existing customers. Given the many advantages of the Q-smart, the product may eventually supersede the Q-bot. These advantages include lower capital investment, fast deployment capabilities and lower staffing requirements, as there is no need for a Q-bot rental office and customers can purchase a product before going to the park or when they are in it. However, the Q-bot is a made-for- purpose, ruggedised device and Q-smart users will take on the risks relating to their own hardware and phone charges.

Q-band. Q-band is a lightweight waterproof wristband, initially intended for use in water parks, incorporating a virtual queuing system. The Q-band is RFID-based (ie near field) – a user goes to one of several kiosks at the park to book a ride, where they swipe the wristband. It also has a screen and the product is being developed for cashless payments and access control.

Ticketing. accesso Passport is a ticketing and e-commerce solution tailored for on-site, the internet and mobile phones. The solutions are cloud computing-based and multi-tenanted, meaning there is a single version of the software for all customers. The attraction of a cloud-based solution is that it can be implemented swiftly, updated regularly without interruption to customers and there are no infrastructure costs for the customer. We understand that none of accesso’s key US competitors can offer a cloud solution of the scope or scale of accesso’s offering. Revenues are largely generated from the volumes of transactions, contracts are typically at least three years and we note accesso’s customers have been very stable. Management believes the onsite ticket office is in decline, as tickets are increasingly being purchased before guests arrive at an attraction. Mobile is increasingly becoming the preferred payment mechanism, driven by 4G and LTE mobile technology and accesso’s cloud- based solution is strongly suited to this backdrop.

Payments. Accesso also brings to the group a proprietary PCI Level 1 payment gateway, which provides customers with a mechanism to manage payments from their customers. This also operates with a transaction-based business model. Season pass monthly payment processing is an increasing activity, as the group seeks to increase the proportion of guests that are Season Pass holders.

Digital content. Accesso has an exclusive agreement with a US-based mobile app developer, which enables the group to offer mobile phone apps to its customers. These apps typically enable users to plan their trip, buy tickets, find locations (eg restrooms, restaurants) and share their experiences on social networks. The ability to offer tailored apps to park and attractions operators is clearly important for the business and the group’s virtual queuing could be bundled in to offer a complete solution.

Finally, accesso offers multi-lingual customer support, utilising a call centre in Canada that helps users with issues, for example when someone is having trouble buying a season ticket.

Target markets: Leading theme parks and water parks While the group has a well-established operation at Six Flags, it has five other nascent virtual queuing footholds in top 10 theme park operators, all of which have the potential to be expanded significantly. This includes private equity-owned Merlin and Parques Reunidos – both groups have broad portfolios of theme parks and other attractions spread across a range of countries. In October, Compagnie des Alpes became a customer with the Q-smart deal at Walibi Holland. The Q-bot is also now in operation at Universal Studio’s Islands of Adventure and Universal Studios Florida. Four of the top 10 are accesso ticketing customers, including Cedar Flags, which is not a Lo-Q virtual queuing customer. We

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see Disney as an unlikely customer, as it tends to develop its own systems, although the Disney backgrounds at accesso add an interesting dimension.

Exhibit 3: World’s 10 largest theme park operators Base Major attractions include: Ownership Est’d attendance (m) Lo-Q customer corporations 2009 2010 2011 QLM** Ticketing 1 Walt Disney Parks and US Disneyland, Walt Disney World Public 119.1 120.6 121.4 No No Resorts Resort (NYSE:DIS) 2 Merlin Entertainments UK Legoland, Mme Tassauds, Hermes Private 38.5 41 46.4 Yes No Group London Eye, Chessington WoA, Equity Alton Towers 3 Universal Studios US Universal Studios Hollywood, NBCUniversal – 23.7 27.1 30.8 Not No Recreation Group Universal Orlando Resort Comcast (51%)/ confirmed GE (49%) 4 Parques Reunidos Spain Parque de Atracciones de Candover 24.8 25.8 26.22 Yes Yes , ; Investments Palace Entertainment (US) 5 Six Flags Inc US Six Flags Public (NYSE:SIX) 23.8 24.3 24.3 Yes Yes 6 SeaWorld Parks & US SeaWorld, Busch Gardens, Blackstone 23.5 22.4 23.6 No No Entertainment Aquatica, Adventure Island Group 7 Cedar Fair US Cedar Point, Wonderland Public 21.1 22.8 23.4 No YES Entertainment (NYSE:FUN) 8 OCT Parks China China Splendid China, Window of the Public 15.8 19.3 21.73 No No World (SHE:000069) 9 Herschend Family US Dollywood, Adventure Aquarium Private, family 9* 9.6 9.5 Yes Yes Entertainment Corp owned 10 Compagnie des Alpes France Parc Astérix, Fort Fun Adventure Public (EPA:CDA) 10 9 9.21 Yes No (Grévin & Cie SA) Land Total 309.3* 321.9 336.56 Source: Themed Entertainment Association, Edison Investment Research. Note: *Herschend is estimated for 2009. **Queue line management.

Financials: Seasonal business with bulk of revenues in H2

Most revenues are generated over the northern hemisphere summer months and hence the bulk of group revenues are in H2. The end of H1 (30 April) is roughly the bottom of the group’s cash flow cycle, while 31 October is near the top, as nearly all parks are shut by 1 November. Management is seeking to reduce the seasonality by expanding geographically and into new verticals that are less sensitive to weather, ie indoor activities. Winter is deal-signing season, which follows several annual trade shows in late-autumn culminating in the IAAPA show in Orlando, Florida, in early-November.

Revenue recognition. In respect of the group’s traditional virtual queuing operations, when Lo-Q is the operator and runs the workforce, as at Six Flags, Lo-Q recognises the entire revenue stream. Operating costs and the proportion shared with the park operator are reflected in cost of sales. When Lo-Q does not run the workforce, it accounts for its proportion of the revenues, after operating costs; the park operator would normally run the facilities, but Lo-Q may also manage them using park staff.

Forecasts: Revenues edge down, PBT and EPS edge up We have eased our forecast for “water parks – full revenue recognition” to reflect the lower-than- expected results in FY12. “Theme parks – proportionate rental method” rises to reflect an additional theme park. Otherwise, our revenue forecasts are unchanged. In all, group revenue slips to £38.3m in FY13 from £39.4m and to £40.6m in FY14 (£41.1m). Adjusted operating profit is unchanged at £4.6m (£4.6m) in FY13 and edges up to £5.1m (£5.0m) in FY14, reflecting the lower-than-expected operating costs in FY12 feeding through into FY13 and FY14, which is largely balanced by lower development cost net capitalisation. EPS rises to 16.7p (16.3p) and 18.4p (17.6p) respectively after we have slightly reduced our tax charge forecasts.

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Revenues. Our conservative forecasts assume just one net new theme park customer per year (proportionate rate method) and six new water park customers (three proportionate, three full revenue). Our maintained accesso revenues assume 15% growth in FY13 and c 13% in FY14.

Gross margin. We forecast gross margin to jump from 23.4% in FY12 to 30.1% in FY13, 31.3% in FY14 and 33.0% in FY15. The gains reflect the impact of the addition of the higher-margin accesso business and an increasing percentage of high-margin “proportionate revenues”.

Operating costs/margins. We forecast that costs, before development capitalisation/amortisation, rise 96% in FY13 to £7.2m and 8.4% in FY14 to £7.8m. We forecast operating margins to rise to 12.0% in FY13, 12.5% in FY14 and 13.9% in FY15. The margin rise reflects a degree of fixed costs and the improving gross margins.

Investment. We forecast £1.34m of R&D in FY13, after incorporating accesso, of which £670k is capitalised. This reflects ongoing hardware, eg Q-band, and broader software development. Going forward, we assume 3.5% of revenues are spent on R&D, of which 45% is capitalised and the balance expensed in that year. We assume capitalised development is amortised on a straight-line basis over five years. We assume £1.5m of capex in FY13 and £1.2m in FY14. As the capital intensity of the business declines with the shift to smart phone devices, the rate tapers down to 1.5% of sales.

Tax. We have reduced our tax forecasts and now assume an effective tax rate of 27% on normalised PBT in FY13 through to FY15. This rate reflects the significant operations in the US and Europe. However, we expect the group to benefit from the UK’s “Patent Box” tax incentives, which begin to phase in from April this year.

Cash flow and balance sheet. The group had £8.9m net cash as at 31 October 2011. We forecast free cash flow of c £1.5m in FY13 expanding to £2.7m in FY14 and to £4.0m in FY15, with net cash dipping to £2.6m after the payments for accesso at the end of FY13, rising to £5.3m a year later.

Exhibit 4: Forecasts Revenues (£'000s) 2010 2011 2012 2013e 2014e 2015e Theme parks - Total rental method 26,581 27,112 27,654 Water parks - Total rental method 4,858 5,460 6,085 Theme parks - Proportionate rental method 1,435 1,819 2,534 Water parks - Proportionate rental method 48 181 436 accesso 5,363 6,047 6,702 Group Revenue 20,304 24,546 29,137 38,285 40,619 43,412 Growth (%) 17.4 20.9 18.7 31.4 6.1 6.9 Gross Profit 5,042 6,207 6,811 11,520 12,728 14,316 Gross margin (%) 24.8 25.3 23.4 30.1 31.3 33.0 Op expenses (before devt costs) (3,014) (3,484) (3,693) (7,232) (7,839) (8,440) Capitalisation of dev costs (net) 328 40 60 305 191 163 Adjusted operating profit 2,355 2,764 3,178 4,594 5,080 6,038 Operating profit margin (%) 11.6 11.3 10.9 12.0 12.5 13.9 Growth (%) (2.7) 17.3 15.0 44.5 10.6 18.9 Net interest 7 35 60 (130) (100) (50) Profit before tax norm 2,363 2,799 3,238 4,464 4,980 5,988 Share-based payments (42) (97) (84) (113) (125) (138) Exceptional items 0 0 0 (395) 0 0 Profit before tax 2,321 2,702 3,154 3,956 4,855 5,851 Taxation (448) (761) (632) (1,205) (1,345) (1,617) Net income 1,873 1,941 2,521 2,751 3,510 4,234 Adjusted EPS (p) 12.0 12.1 15.0 16.7 18.4 21.8 P/E - Adjusted EPS 37.0 36.5 29.4 26.4 24.1 20.3 Source: Lo-Q accounts (historics), Edison Investment Research (forecasts)

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Sensitivities: Highly seasonal, weather sensitive

The bulk of the group’s revenues are generated in several weeks over the summer and the vast majority of revenues are in the northern hemisphere. We highlight the following sensitivities:

 Economic environment. The group’s customers are exposed to economic slowdown. Virtual queuing is potentially more sensitive to a slowdown, as a weak economic backdrop might shorten the lengths of queues and reduce the requirement for priority systems.

 Seasonality and weather. Theme and water parks have short seasons. Bad weather or environmental interruptions could significantly affect the year’s profits and cash flow.

 Competitive environment and technological change. Virtual queuing is a new concept and, while Lo-Q is protected by several patents, there is a risk that another company might develop an improved system. The development of mobile phone apps could be a threat, although Lo-Q is protected by several patents and others pending. The group’s ticketing business is subject to vibrant competition, but it has managed to beat the competition via a leading-edge solution.

 Customer concentration. The group currently has high exposure to the US, where it generates significant revenues. Its North American virtual queuing users are presently concentrated through Six Flags, a large US theme park chain. The Six Flags water parks deal has boosted the concentration in the short term, while new deals elsewhere should temper it in the long run.

 Acquisition risk. Implementation risk in the acquisition strategy.

Valuation: A major growth play in leisure technology

Lo-Q has firmly established itself with five years of strong cash generation and a high-quality customer base in the theme park industry. The accesso deal has transformed Lo-Q on a number of levels, from strengthening the management team to broadening the product offering and customer base. While the group already had strong growth drivers and excellent deal momentum, the acquisition adds strong cross-selling opportunities, the potential to extend accesso’s products outside the US and the ability to offer customers a one-stop-shop solution. We highlight the following points on the group’s valuation:

 Traditional valuation measures. In traditional P/E valuation terms, the stock trades on 26.4x our forecasts in FY13, falling to 24.1x in FY14 and to 20.3x in FY15.

 Cash generation. Free cash flow was £1.3m in FY12, representing a FCF yield of 1.5%. On our forecasts, this rises to 1.8% in FY13, c 3.2% in FY14 and c 4.7% in FY15.

Exhibit 5: Cash flow FY09 FY10 FY11 FY12 FY13e FY14e FY15e Adjusted operating profit 2,420 2,355 2,764 3,178 4,594 5,080 6,038 Depreciation (incl s/w & IPR) 50 157 295 721 1,072 1,219 1,284 Working capital (373) 306 (555) (103) (613) (650) (217) Amortisation of development costs 111 210 304 351 365 448 521 Exceptional items and foreign exchange (35) (41) 74 (85) (395) 0 0 Operating cash flow 2,173 2,988 2,882 4,063 5,023 6,097 7,626 Net interest 10 7 35 60 (130) (100) (50) Tax (13) (528) (622) (753) (1,071) (1,245) (1,527) Purchase fixed assets (incl s/w) (36) (230) (532) (1,642) (1,461) (1,219) (1,172) Capitalised development (278) (538) (344) (411) (670) (640) (684) Intellectual property rights (32) (203) 0 (42) (150) (150) (150) Free cash flow 1,824 1,496 1,419 1,274 1,541 2,744 4,043 Source: Lo-Q accounts (historics), Edison Investment Research (forecasts)

 Discounted cash flow. In Exhibit 6, our DCF generates a valuation of 468p, assuming a 10% weighted average cost of capital (which we have cut from 11% to reflect the increasing diversity of the business). The model assumes conservative revenue growth rates, given the strong historic revenue growth of both Lo-Q and the acquired accesso businesses. The rising margin trend

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reflects the group’s fixed costs and scalability, falling capex, the healthy margin accesso business and growth in higher-margin proportionate revenues.

Exhibit 6: Discounted cash flow model Year 2013 2014 2015 2016 2017 2018 2019 2020 2030 Revenue (£'000s) 38,285 40,619 43,412 46,238 49,085 51,942 54,763 57,537 72,894 Growth (%) 31.4 6.1 6.9 6.5 6.2 5.8 5.4 5.1 2.0 Adjusted operating profit (£'000s) 4,594 5,080 6,038 7,259 8,561 9,956 11,391 12,754 17,361 Operating margin (%) 12.0 12.5 13.9 15.7 17.4 19.2 20.8 22.2 23.8 Depreciation (£'000s) 1,072 1,219 1,284 1,105 944 813 779 821 1,072 Development capitalisation (net) (£'000s) (305) (191) (163) (178) (146) (119) (134) (133) (66) EBITDA (adjusted) (£'000s) 5,360 6,107 7,159 8,186 9,359 10,651 12,036 13,442 18,367 Working capital (£'000s) (613) (650) (217) (231) (245) (260) (274) (288) (364) Capex (£'000s) (1,461) (1,219) (1,172) (925) (736) (779) (821) (863) (1,093) Tax (£'000s) (936) (1,222) (1,527) (1,888) (2,242) (2,567) (2,916) (3,270) (4,491) Free operating cash flow (£'000s) 2,351 3,016 4,243 5,142 6,136 7,045 8,025 9,021 12,418 Proportionated year 1 & terminal value 1,688 3,016 4,243 5,142 6,136 7,045 8,025 9,021 170,751 Discounted free op cash flow (£'000s) 1,576 2,561 3,275 3,608 3,914 4,085 4,230 4,323 31,548 Implied enterprise value (£'000s) 89,469 Adjusted net (debt)/cash (£'000s) 1,025 Equity valuation (£'000s) 90,495 Number of shares (m) 19.3 Equity value per share (p) 468 Current share price (p) 442.5 Up/(down)side from current price 6% Scenario analysis: Weighted average cost of capital 12.0% 11.5% 11.0% 10.5% 10.0% 9.5% 9.0% 8.5% Equity value per share (p) 359 382 407 436 468 505 547 596 Source: Edison Investment Research. Note: Assumptions include revenue growth tapering down to 2% from FY25 and a WACC of 10%.

Background: Dynamic virtual queuing concept began in 1997

The dynamic virtual queuing concept arose after Leonard Sim, Lo-Q’s founder, and his family visited a Florida theme park in the 1990s. After the family queued at a ride for almost two hours, it was closed due to mechanical problems. Mr Sim proceeded to develop the original Lo-Q system and Lo-Q was founded in March 2000. Lo-Q joined AIM in 2002, swung into profit in 2006, and began its upward trajectory. The group’s major customer, Six Flags, slipped into Chapter 11 bankruptcy for 10 months from June 2009, but the episode had little impact on Lo-Q’s performance. Jeff McManus, the previous CEO, left the company after 10 years in July 2010 and Tom Burnet, the current CEO, joined the group in October 2010. Mr Sim continues to hold an executive role on the board and retains a significant shareholding. His responsibilities include product development and strategic planning.

Exhibit 7: Lo-Q’s shares have correlated closely with Six Flags, since SF rejoined the NYSE in 2010

500 400 300 200 100 0 Jul/10 Jul/11 Jul/12 Jan/11 Jan/12 Jan/13 Mar/11 Mar/12 Sep/10 Sep/11 Sep/12 Nov/10 Nov/11 Nov/12 May/10 May/11 May/12 Lo-Q Six Flags (rebased, in £ terms)

Source: Thomson Reuters Datastream

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Lo-Q | 12 February 2013

Exhibit 8: Financial summary £'000s 2010 2011 2012 2013e 2014e 2015e Year end 31 October IFRS IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 20,304 24,546 29,137 38,285 40,619 43,412 Cost of Sales (15,262) (18,339) (22,326) (26,765) (27,891) (29,096) Gross Profit 5,042 6,207 6,811 11,520 12,728 14,316 EBITDA 2,512 3,058 3,899 5,666 6,299 7,322 Adjusted Operating Profit 2,355 2,764 3,178 4,594 5,080 6,038 Amortisation of acquired intangibles 0 0 0 0 0 0 Exceptionals 0 0 0 (395) 0 0 Share based payments (42) (97) (84) (113) (125) (138) Operating Profit 2,313 2,667 3,094 4,086 4,955 5,901 Net Interest 7 35 60 (130) (100) (50) Profit Before Tax (norm) 2,363 2,799 3,238 4,464 4,980 5,988 Profit Before Tax (FRS 3) 2,321 2,702 3,154 3,956 4,855 5,851 Tax (448) (761) (632) (1,205) (1,345) (1,617) Profit After Tax (norm) 1,915 2,038 2,606 3,258 3,635 4,371 Profit After Tax (FRS 3) 1,873 1,941 2,521 2,751 3,510 4,234 Minority interest 0 0 0 0 0 0 Adjustments for normalised earnings 0 0 0 0 0 0 Net income (norm) 1,915 2,038 2,606 3,258 3,635 4,371 Net income (FRS 3) 1,873 1,941 2,521 3,146 3,510 4,234

Average No of Shares Outstanding (m) 16.0 16.8 17.3 19.5 19.8 20.1 EPS - normalised (p) 12.0 12.1 15.0 16.7 18.4 21.8 EPS - normalised & fully diluted (p) 11.5 11.6 14.4 16.1 17.7 21.0 EPS - FRS 3 (p) 11.7 11.5 14.6 14.1 17.7 21.1 Dividend per share (p) 0.00 0.00 0.00 0.00 0.00 0.00 Gross Margin (%) 24.8 25.3 23.4 30.1 31.3 33.0 EBITDA Margin (%) 12.4 12.5 13.4 14.8 15.5 16.9 Operating Margin (before GW and except.) (%) 11.6 11.3 10.9 12.0 12.5 13.9 BALANCE SHEET Fixed Assets 1,382 1,660 2,968 16,614 16,806 16,857 Intangible Assets 1,204 1,183 1,233 14,165 14,357 14,520 Tangible Assets 178 478 1,451 2,165 2,165 2,053 Other 0 0 284 284 284 284 Current Assets 7,091 9,127 10,403 8,961 12,396 16,978 Stocks 243 494 456 599 635 679 Debtors 829 1,135 1,033 1,785 2,440 2,936 Cash 6,018 7,498 8,914 6,577 9,321 13,363 Current Liabilities (1,214) (1,354) (970) (1,294) (1,346) (1,680) Creditors (1,214) (1,354) (970) (1,294) (1,346) (1,680) Short term borrowings 0 0 0 0 0 0 Long Term Liabilities 0 0 (43) (4,043) (4,043) (4,043) Long term borrowings 0 0 0 (4,000) (4,000) (4,000) Other long term liabilities 0 0 (43) (43) (43) (43) Net Assets 7,260 9,433 12,357 20,238 23,813 28,112 CASH FLOW Operating Cash Flow 2,988 2,882 4,063 5,023 6,097 7,625 Net Interest 7 35 60 (130) (100) (50) Tax (528) (622) (753) (1,071) (1,245) (1,527) Capex (971) (876) (2,095) (2,280) (2,008) (2,006) Acquisitions/disposals 0 0 0 (13,789) 0 0 Shares issued 84 61 143 5,911 0 0 Dividends 0 0 0 0 0 0 Net Cash Flow 1,580 1,479 1,417 (6,337) 2,744 4,042 Opening net debt/(cash) (4,439) (6,018) (7,498) (8,914) (2,577) (5,321) HP finance leases initiated 0 0 0 0 0 0 Other 0 0 () 0 0 0 Closing net debt/(cash) (6,018) (7,498) (8,914) (2,577) (5,321) (9,363) Source: Lo-Q accounts (historics), Edison Investment Research (forecasts)

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Revenue by geography Contact details Unit 2, The Pavilions N/A Ruscombe Park Twyford, Berkshire UK +44(0) 118 934 7400 www.lo-q.com

CAGR metrics Profitability metrics Balance sheet metrics Sensitivities evaluation EPS 2011-15e 15.8 ROCE 14e 20.5 Gearing 14e N/A Litigation/regulatory  EPS 2013-15e 14.0 Avg ROCE 2011-15e 91.1 Interest cover 14e N/A Pensions  EBITDA 2011-15e 24.4 ROE 14e 15.3 CA/CL 14e 9.2 Currency  EBITDA 2013-15e 13.7 Gross margin 14e 31.1 Stock days14e 5.7 Stock overhang  Sales 2011-15e 15.3 Operating margin 14e 12.5 Debtor days 14e 21.9 Interest rates  Sales 2013-15e 6.5 Gr mgn / Op mgn 14e 2.5 Creditor days 14e 10.5 Oil/commodity prices 

Management team

Chief Executive: Tom Burnet Finance Director: John Alder Mr Burnet joined Lo-Q as CEO in October 2010. He was previously Mr Alder joined Lo-Q as FD in September 2009. Previously, he held MD of Serco’s 5,000-person defence services division. Before finance director and controller positions in quoted and private pan- Serco, he was MD of QinetiQ’s capability support division. European businesses. Chief Operating Officer, North America: Steven Brown Chairman: John Weston Mr Brown was appointed to the board following the acquisition of Mr Weston joined Lo-Q as chairman in May 2011. He was CEO of accesso, where he was principal and CEO, in December 2012. BAE Systems from 1998 to 2002. He is also chairman of Acra Before accesso, he spent 16 years with Walt Disney. Control, MB Aerospace, AWS Electronics and Torotrak.

Principal shareholders (%) Mr Leonard Sim 12.4 Prudential plc group of companies 10.3 Mr Steven Brown 8.9 BlackRock 6.9 Lo-Q Employee Benefit Trust 4.4 Standard Life Investments 3.6

Companies named in this report Walt Disney (NYSE:DIS), Merlin Entertainment, Universal Studios, Parques Reunidos, Six Flags (NYSE:SIX), Cedar Fair (NYSE: FUN), SeaWorld Parks & Entertainment, OCT Parks China (SHE:000069), Herschend Family Entertainment, Compagnie des Alpes (EPA:CDA), Grévin & Cie, MasterCard, Dollywood

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