17 October 2005

29 March 2007 Equity Research MORNING NOTE Buy 61.5p (Remains Unchanged) Citel Target Price: 65.0p (100p) Trading update Stock Codes: CITE.L / CITE LN Progress with the tier 1 carriers is taking longer than anticipated. The EPS company has re-focused much more on smaller carriers where it can get more Mar 2006A -23.5p immediate traction. We have made significant cuts to our estimates and Mar 2007E (-14.5p) -14.4p reduced our price target to 65p from 100p. We still believe there is an Mar 2008E (-1.1p) -8.4p opportunity for high risk/reward investors, and the stock is well priced. We therefore retain our Buy recommendation. Panmure Gordon Estimates ! Revenues for FY07 are in line with expectations at US$4.4m, which should equate to Market Cap: £13m around £2.3m. This will be a significant drop on the £4.0m reported in FY06, however, this is an expected result of the transition to the Portico TVA (formerly ‘Handset Gateway’) product. Analyst ! Turning the pipeline of opportunities with the two major tier 1 carriers to revenue is Nick James, CFA +44 (0)20 7614 8325 taking longer than anticipated and predicting timing remains difficult. The relationships [email protected] with these carriers give the potential for very significant sales leverage at some point, but it’s still unclear when. This uncertainty drives a discounting and push out of our expected revenue from the tier 1 carriers. ! The company has responded to its frustration with tier 1s by expanding its focus on smaller carriers and ISPs. We believe that it should be much easier to turn these channels into short-term revenue drivers for the company. Initial indications are positive, and a number of volume deployments have been won. We have cut our estimates significantly to reflect the tier 1 push outs. However, the ! company should still be able to get through these delays without a need to raise cash. The revenue ramp in our model was driven by a large increase in sales and marketing expense, so this can be scaled back in light of the new outlook. The company is also seeing improvement in its debtor days, which should improve cash consumed from working capital. Continues… 29 March 2007 1 Morning Note Citel… continued ! We continue to value Citel’s technology and market opportunity. We believe that the strategic changes and recent personnel changes are positive for the future. Citel, while being an early-stage company, does represent an interesting investment opportunity for investors happy with a high risk/reward profile. Our new price target is 65p, which is driven by our DCF model. This values the equity at around £14m or US$27m, which feels in the right range given the revenue stage of the opportunity. New estimates (£m) FY08E FY09E Old New Old New Revenue 9.92 4.99 18.32 7.93 Opex -6.29 -5.25 -7.24 -5.52 EBIT -0.31 -2.11 3.35 -0.37 Net income -0.27 -2.05 3.47 -0.31 EPS (p) -1.10 -8.38 14.04 -1.26 Net cash 1.35 2.02 4.87 1.35 Source Panmure Gordon Nick James, CFA 29/03/2007 From time to time, we offer investment banking and other services (IBS) to Citel. A member of the Panmure Group has managed or co-managed an issue for Citel. Within the past 12 months, we have received compensation for IBS from Citel. Panmure Gordon & Co acts as corporate broker to Citel in the UK. We buy and sell these securities from customers on a principal basis. Accordingly, we may at any time have a long or short position in any such securities. We make a market in the securities of Citel. The views expressed in this note accurately reflect the research analyst’s personal views about any and all of the subject securities and issuers. No part of the research analyst’s compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst (or analysts) responsible for the content in the report. 29 March 2007 2 Morning Note Buy 1818.0p (Remains Unchanged) Homeserve Target Price: 2200.0p Shortfall in net new policies Stock Codes: HSV.L / HSV LN We were expecting around 1.1m net new UK customer additions, and it looks EPS as though the actual number is 0.8m. This is growth of 17%, which is still a Mar 2006A 57.6p good result against very strong comparatives. The model remains excellent Mar 2007E 70.3p and the US opportunity is huge. We retain our Buy and 2200p target. Mar 2008E 84.5p ! UK policies. New sales have been 1.6m gross. However, when the churn has been Panmure Gordon Estimates accounted for of 14%, the net additions are around 830,000. This is below the net Market Cap: £1,181m additions in the year to March 2006 of 1.15m. This is a slowdown on FY06 new policy growth of 30% to this year’s 17%. Clearly the 30% growth represented a very strong comparable and was boosted by the fears of the very cold winter in 2005/06. As a reminder, as policy numbers mature we expect the marketing budget of around £30m to Analysts Charlie Cottam +44 (0)20 7614 8326 be reduced. [email protected] International. The First Energy initial marketing in the US has gone well. We believe the Mike Murphy +44 (0)20 7614 8345 ! [email protected] higher insurance mindedness of US consumers, lower customer acquisition costs and higher take-up rates, combined with Homeserve’s utility expertise makes the c70m US Specialist Sales household market very attractive for Homeserve. James Cooke +44 (0)20 7614 8361 [email protected] ! Emergency Repair. The outline agreement with a major household insurer to provide fully integrated multi-trade claims is a significant landmark. The Emergency Repair division has as expected seen high levels of activity in H2. ! Valuation. Homeserve is trading at 18.7x our annualised 2008E forecasts yet looks set for 20% earnings growth for the next three years at least. Despite higher growth rates it is on a 11% discount to Capita (21x 2008E) and a 10% discount to Serco (20.7x 2008E). For a growth stock with a proven track record and strong cash generation, we feel 22x 2008E forecasts is justified. As a reality check, 2200p would give an acceptable c5% annualised 2008E free cash flow yield. Charlie Cottam 29/03/2007 From time to time, we may offer investment banking and other services (IBS) to Homeserve. We buy and sell these securities from customers on a principal basis. Accordingly, we may at any time have a long or short position in any such securities. We make a market in the securities of Homeserve. The views expressed in this note accurately reflect the research analyst’s personal views about any and all of the subject securities and issuers. No part of the research analyst’s compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst (or analysts) responsible for the content in the report. 29 March 2007 3 Morning Note Buy 15.0p (Hold) Jessops Target Price: 20.0p (70.0p) March Madness takes its toll, upgraded to Buy Stock Codes: JSP.L / JSP LN We don’t see an easy way out for Jessops, but the current ‘March Madness’ EPS doesn’t just apply to its marketing campaign. At 15p the stock is trading on a Sep 2006A 10.9p market cap of less than 5% of sales, an EV/Sales of 19%. It’s either going bust Sep 2007E -2.9p or worth substantially more. While we can see the difficult trading outlook Sep 2008E -0.1p continuing and a probable refinancing we believe there’s upside to the current share price and we upgrade to Buy from Hold with a target price of 20p, down Panmure Gordon Estimates from 70p. Market Cap: £15m ! The cockroach theory has certainly worked with Jessops. Just as you never see a single cockroach without knowing there are more lurking in the crevices, so it is with profit warnings. The second one in a month, the exit of the Chairman and the Commercial Analysts Christian Koefoed-Nielsen +44 (0)20 7614 8335 Director and a strategic review, with refinancing required to meet a working capital uplift [email protected] in H2, is a toxic combination. Philip Dorgan +44 (0)20 7614 8324 [email protected] ! Can anything be salvaged? Time after time in this sector retailers are written off on valuations of 10-15% market cap to sales (on an EV basis Jessops is on 19% of sales). Yet ultimately the basket cases more often than not recover from these levels. The stock looks desperately oversold. On our current forecasts, EBITDAR is around £21m, Interest and Rents around £17.1m, giving fixed charge cover of 1.2x and net debt (around £155m capitalising leases at 7x) to EBITDAR of 7.5x. These may be in line with private equity levels of gearing, but they are too high for stock market tolerance for a company with Jessops operational gearing, in our view. ! To get fixed charge cover to around 1.7x (a level that WH Smith tolerated for some time, as did Arcadia) on our current forecast for FY07E EBITDAR implies a reduction in interest and rent charges of around £4.7m, which in turn implies potential equity dilution from a rescue rights issue or some form of convertible obligation plus a reduction in the rent bill via store closures.

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