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.

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. Inventory is around £60m on our estimates (ie around 4x current market cap) but is matched closely by creditors. In our view, neither the banks nor Jessops’ major suppliers have an interest in letting it go bust. ! Clearly there are structural issues in its market place. Product price deflation is rampant (compact cameras down 16.3% in value in January), mobile phone camera specifications have substantially improved, Jessops’ reliance on a very narrow product market leaves its sales volatile and it has added capacity rapidly over the past few years. Nevertheless we believe that value will be salvaged from the wreckage and that buying when there’s blood in the street is a better option than heading for the hills. Our target price represents a market capitalisation of just over £20m, around 6% of sales. On an EV/Sales basis this rises to 21%. For investors with a high risk tolerance this is a Buy, which may indicate the company will go private once again.

Christian Koefoed-Nielsen 29/03/2007 From time to time, we may offer investment banking and other services (IBS) to Jessops. 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 Jessops.

29 March 2007 4

Morning Note

Sell 271.0p (Remains Unchanged) Kingfisher Target Price: 195.0p Reassuring results but an expensive stock Stock Codes: KGF.L / KGF LN The results were in line, and we are unlikely to see any major changes to consensus, but EPS there were some encouraging signs for the group, with a lower-than-expected tax rate, Jan 2006 A 12.2p strong cash flow generation, and a significant reduction in the pension deficit. On the Jan 2007 A 11.9p other hand, the UK performance was aided in Q4 by around £6m of one-offs, debt Jan 2008 E 12.2p reduction was relatively minor and return on invested capital declined. The valuation is still too rich for us. We retain our Sell recommendation and 195p target price. Panmure Gordon Estimates ! The rot does appear to have stopped at Kingfisher. It’s difficult to argue strongly against a Market Cap: £6336m 55% improvement in cash generated from operations. The UK DIY market appears to have stabilised. The real estate portfolio of £3.2bn has increased by around 9% and will continue to feed the dreams of private equity optimists. The dividend has been Analysts maintained, though barely covered and the Rest of Europe performance, profits up 26.6% Christian Koefoed-Nielsen +44 (0)20 7614 8335 in constant currencies, was excellent. [email protected] Philip Dorgan +44 (0)20 7614 8324 ! However, France was relatively weak, with profits down 9.9% in constant currency and [email protected] ongoing price pressure impacting gross margin by around 100bp in H2. This is expected

to continue into the current year.

! Our sense is that Kingfisher is becoming more capital intensive, with declining return on invested capital (from 7.3% to 6.9%) in FY07, a step-up in investment in the UK in order to drive the hoped-for 25% sales uplift in B&Q larger stores, and the modernisation of the Castorama chain. We approve of the strategy of channelling investment into higher-return geographies, but Kingfisher’s domestic (UK and France) mature businesses continue to

absorb investment, with as yet, no great visibility on the returns this investment should generate. ! While this is a positive statement, and the rot seems to have stopped, we still consider Kingfisher expensive. At 22.3x calendarised 2007E earnings, the stock is on a 25% premium to the sector, and while we believe in international growth to offset maturity in core domestic markets, the current valuation doesn’t appear to offer upside. Once again expectations for next year are being trimmed back, delaying the time when earnings growth brings the share price valuation more in touch with reality. Our 195p target price implies a P/E of 16x, which may seem harsh, but B&Q’s level of profitability is highly unlikely to return to the levels of old in the next three years, although the margin attrition may have finally bottomed out. We see better value elsewhere in the sector and maintain our Sell rating.

Christian Koefoed-Nielsen 29/03/2007 From time to time, we may offer investment banking and other services (IBS) to Kingfisher. 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 may make a market in the securities of Kingfisher.

29 March 2007 5

Morning Note

Hold 493p (Remains Unchanged) Robert Wiseman Target Price: 470p (430p) Trading remains strong, price target upgraded from 430p to 470p Stock Codes: RWD.L / RWD LN Wiseman confirmed an excellent year and some modest volume wins for next EPS year. It is also planning to increase the ultimate capacity at its new South-West Mar 2006A 25.4p dairy to 500ml reflecting strong growth from its major customers and tight Mar 2007E 31.9p capacity utilisation rates at existing sites. Dairy commodity prices have Mar 2008E 33.4p recently spiked up significantly, and we think there could be scope for upgrades to 2008E forecasts. As such, we increase our price target from 430p Panmure Gordon Estimates to 470p. Market Cap: £358m ! Trading statement. Wiseman confirmed its trading was in line with expectations. We expect EPS to rise by 26% to 31.9p driven by an expansion of operating profit per litre from 2.00p last year to 2.37p this year. Analysts Graham Jones +44 (0)20 7614 8346 ! Scope for upgrades next year? We currently forecast 5% EPS growth in 2008E, held [email protected] back somewhat by higher interest costs due to the capex at the new Bridgwater dairy, Charles Hall +44 (0)20 7614 8328 [email protected] which it now plans to expand to an ultimate capacity of 500ml (initial capacity will be 200ml). It has also won 40ml of new business with the Co-op and Booths. Finally, commodity prices have spiked higher recently, which could have a benefit, although there

is no visibility as to how long this may be sustained for. Summary. We believe 2008E forecasts could be raised, and as such, we increase our price ! target from 430p to 470p.

Graham Jones

29/03/2007 From time to time, we may offer investment banking and other services (IBS) to Robert Wiseman. 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 Robert Wiseman.

29 March 2007 6

Morning Note

Buy 470.0p (Remains Unchanged) SCi Entertainment Group Plc Target Price: 650.0p Steady progress in H1 Stock Codes: SEG.L / SEG.LN H1 results confirmed steady progress at SCi and were essentially in line with EPS our expectations. Along with the rest of the industry, SCi is preparing itself for Jun 2006A 20.9p the wave of growth implied by the next generation of platforms. Jun 2007E 25.5p Jun 2008E 33.8p ! The H1 results were more or less in line with expectations. Although sales of £74.5m (up 48.7%) were better than our forecast (£70.0m), this was due to strong sales of low-margin Panmure Gordon Estimates third-party distribution products - gross profit of £24.4m (up 21.4%) was in line with our Market Cap: £406m forecast. ! With the launch of PS3 in various geographies over the past six months, the videogames industry is gearing up for a multi-year period of strong growth. With a strong balance Analyst sheet following the deal with Time Warner, SCi Entertainment is investing in products, Richard Newboult +44 (0)20 7614 8338 people, development capacity and new media. [email protected] ! We are very encouraged that the statement confirmed that 20th Century Fox is working on a film version of Hitman – and particularly that such a high profile director as Luc Besson

will produce the film. We regard Hitman as being one of the group’s most powerful pieces of IP and we expect the franchise to benefit from a film about Agent 47.

! The company is holding a meeting for investors this afternoon (29 March). We do not expect to make any significant changes to our forecasts and we maintain our Buy recommendation with a target price of 650p. With the shares currently near the bottom of their recent trading range and Tomb Raider: Anniversary due to be released shortly, we think

this is a very good opportunity to buy SCi shares.

Richard Newboult 29/03/2007 From time to time, we may offer investment banking and other services (IBS) to SCi Entertainment Group Plc. 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 SCi Entertainment Group Plc.

29 March 2007 7

Morning Note

Hold 544.5p (Sell) Tate & Lyle Target Price: 550.0p News on Amylum disposal imminent, upgraded to Hold Stock Codes: TATE.L / TATE LN Tate has little to add on current trading, apart from to reconfirm the slow rate EPS of progress in Sucralose. Of most interest is the comment that there will be an Mar 2006A 41.8p update in a “few weeks” on the disposal of Amylum. We have not adjusted our Mar 2007E 46.4p forecasts for the dilutive impact of the deal and we believe Tate would need to Mar 2008E 52.3p be aggressive with buybacks in order to mitigate the worst of the effect. As the shares are now below our target price, we upgrade our recommendation from Panmure Gordon Estimates Sell to Hold. Market Cap: £2,666m ! Little news on trading. The statement simply confirmed that trading was in line with market expectations and that sucralose sales and profits are only modestly ahead of last year. The rest of the statement listed exceptionals relating to the closure of Eastern Sugar Analyst Graham Jones +44 (0)20 7614 8346 (up £15m), write down of the value of the UK astaxanthin business (down £35m) and [email protected] gain on the sales of Canadian sugar business (up £50m next year).

! Amylum. The real news was that Tate plans to make a statement in the next few weeks regarding the full or partial disposal of Amylum. We would not be surprised if the business had to be broken up to be sold, and the market is already widely expecting

around 10% earnings dilution. However, if Tate was aggressive with using the cash for share buybacks the dilution could be partially mitigated.

Italian JV. Tate has announced a JV with Eridania to market sugar in Italy. This is a ! sensible move giving Tate a better sales function in Italy which needs substantially higher sugar imports given the significant reduction in beet production in that country.

! Conclusion. The shares are now trading below our 550p price target, and as such, we upgrade our recommendation from Sell to Hold, while retaining our price target.

Graham Jones 29/03/2007 From time to time, we may offer investment banking and other services (IBS) to Tate & Lyle. 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 may make a market in the securities of Tate & Lyle.

29 March 2007 8

Morning Note

Buy 474.5p (Remains Unchanged) VT Group Target Price: 535.0p Solid trading, awaiting shipbuilding JV Stock Codes: VTG.L / VTG LN VT is trading in line with our forecasts. The key negotiations on consolidating EPS UK shipbuilding “continue to make good progress”. The outcome of these Mar 2006A 24.4p maybe in the next month would at least end the uncertainty. With 13% upside Mar 2007E 28.4p to our 535p target, we continue to rate the shares a Buy. Mar 2008E 31.1p ! Support Services. The MFTS contract is on track to commence in the summer. We Panmure Gordon Estimates understand the long-awaited Air Tanker contract may finally reach financial close at the Market Cap: £831m end of the summer as well. VT is well placed to win further Building Schools for the Future contracts, having won two, and will start further bidding in the next six months. The Naval Base Review is now expected in the summer, and the cost savings VT’s JV FSL has proposed should ensure that Portsmouth is maintained. Analysts Charlie Cottam +44 (0)20 7614 8326 ! Shipbuilding. The restructuring of Halmatic is not unexpected. There will be a cash cost [email protected] of £4m, which will be more than offset by the sale of the site of around £20m (£1m an Mike Murphy +44 (0)20 7614 8345 [email protected] acre). The result of the Trinidad OPV bid of around £100m should be known in the next few months. Specialist Sales James Cooke +44 (0)20 7614 8361 ! Shipbuilding consolidation. We only know what has been leaked in the press which [email protected] is… VT to have joint control, though a minority ownership. BAE will have an option to buy out VT’s stake in the next few years at an agreed minimum price. The announcement of an agreement may well be co-ordinated with confirmation to build the two aircraft

carriers. ! Valuation. In the short term the key variable is the result of the shipbuilding consolidation discussions. Assuming a £149m value for shipbuilding, the remaining VT support services operations are trading at 15x March 2009 EPS, which looks good value versus Serco on 21.3x December 2008E EPS.

Charlie Cottam 29/03/2007 From time to time, we offer investment banking and other services (IBS) to VT Group. Panmure Gordon & Co acts as corporate broker to VT Group 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 VT Group.

29 March 2007 9

Distribution of investment ratings for equity research (as of 31 Dec 06) Rating: GUIDELINE (return targets may be modified by risk or liquidity issues) Overall Global Distribution (Banking Client*) Buy Expected to produce a total return of 15% or better in the next 12 months Buy Hold Sell Hold Fairly valued: total return in the next 12 months expected to be ±10% 54% (38%) 29% (8%) 17% (0%) Sell Stock is expected to decline by 10% or more in the next 12 months * Indicates the percentage of each category in the overall distribution that were banking and/or corporate broking clients

All of the recommendations and views about the securities and companies in this report accurately reflect the personal views of the research analyst named on the cover of this report. No part of this research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research report. This report has been prepared by a member of the Panmure Group (being Panmure Gordon (UK) Limited ("Panmure Gordon"), its "group" as defined in the Financial Services and Markets Act 2000 and each member of the Panmure Group's directors, employees, agents and nominees). It may not be reproduced, redistributed or copied in whole or in part for any purpose. This report has been approved in the UK by Panmure Gordon solely for the purposes of section 21 of the Financial Services and Markets Act 2000. In the UK, this report is directed at and is for distribution only to persons who (i) fall within Article 19(1) (persons who have professional experience in matters relating to investments) or Article 49(2)(a) to (d) (high net worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (as amended) or (ii) are intermediate customers or market counterparties of Panmure Gordon (all such persons together being referred to as "relevant persons"). This report must not be acted on or relied upon by persons in the UK who are not relevant persons. Panmure Gordon is not a US registered broker-dealer. Transactions undertaken in the US in any security mentioned herein must be effected through a US-registered broker-dealer, in conformity with SEC Rule 15a-6. Neither this report nor any copy or part thereof may be distributed in any other jurisdictions where its distribution may be restricted by law and persons into whose possession this report comes should inform themselves about, and observe, any such restrictions. Distribution of this report in any such other jurisdictions may constitute a violation of UK or US securities laws, or the law of any such other jurisdictions. This report does not constitute an offer or solicitation to buy or sell any securities referred to herein. It should not be so construed, nor should it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. The information in this report, or on which this report is based, has been obtained from sources that the Panmure Group believes to be reliable and accurate. However, it has not been independently verified and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties. The information or opinions are provided as at the date of this report and are subject to change without notice. The information and opinions provided in this report take no account of the investors’ individual circumstances and should not be taken as specific advice on the merits of any investment decision. Investors should consider this report as only a single factor in making any investment decisions. Further information is available upon request. No member of the Panmure Group accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of this report or its contents. By accepting this report you agree to be bound by the foregoing limitations.

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