ASG Group. Leveraging Selective Outsourcing. Monday, January 22, 2007

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1 ASG Group ASZ.AX BUY Leveraging Selective Outsourcing Monday, January 22, 2007 Initiating coverage with buy and $1.20 target price We are initiating coverage on ASG with a buy rating and 12-month PE-based target valuation of $1.20 per share. Our target is based on ASG s listed IT services peers, which trade at an average FY08 PE of 16.3x. A defensive IT services company ASG s main line of business is the provision of managed services throughout Australia. ASG competes directly with large multinational providers including IBM and EDS, differentiating itself by a high level of flexibility and price competitiveness but not quality. ASG s customer base consists of high calibre names spread across various industry segments and state and federal government departments. Revenues are largely contracted with circa 70% of annual sales recurring in the following year. The high level of earnings certainty is a significant advantage that ASG has over its more cyclical listed IT services peers, in our view. Recent contract wins not reflected in ASG s market value We believe that recent large contract wins including QAN, APEC and Ericsson are not being reflected in ASG s market valuation. ASG trades at an unwarranted circa 16% discount to peers despite forecast 2-year EPS growth of 40% in FY07 and 47% in FY08. Price $ month target price $1.20 DCF valuation $1.07 Target valuation method PE Relatives GICS sector Information Technology Avg monthly t/o m 2.7 Diluted mkt capitalisation $m 144 Shares on issue m 124 Enterprise value $m 125 Previous rating Initial Year Ended June 30 06A 07E 08E 09E Sales revenue $m EBITDA $m EBITDA margin % 12.1% 12.6% 14.0% 14.4% EBIT $m EBIT margin % 10.0% 10.7% 12.6% 13.1% Adjusted NPAT $m EPS adj c EPS adj growth % 47% 40% 47% 8% DPS c Franking % 100% 100% 100% 100% PER x PER rel Ex-100 ex Fins x 145% 103% 70% 65% Dividend yield % 3.2% 3.9% 5.0% 5.9% NTA $ EV/EBITDA x P/OCF x ROA % 11% 14% 19% 20% ROE % 11% 13% 18% 17% Debt / Debt + equity % -1% -14% -17% -31% Interest cover (EBIT) x nm ASZ vs IT Services Peers Upside from new contracts Our earnings forecasts do not reflect any new IT managed services contracts beyond H107, despite ASG s track record of successfully winning high calibre projects and current favourable IT industry conditions. We have provided 3 scenarios that highlight the upside to our existing earnings and valuation if ASG were to successfully win $10m/$15m/$20m p.a. of contracted IT managed services projects in each of FY08 and FY09 respectively. Source: IRESS Ramoun Lazar rlazar@veritassecurities.com.au - 1 -

2 Summary and Investment Highlights... 3 Company History... 4 Company Overview... 5 ASG Services Overview... 5 Managed Services... 5 Business Solutions... 6 Microsoft Professional Services... 7 Specialist Technical Services... 7 Investment Positives... 7 A Defensive IT Company... 7 Contract Pricing... 8 Blue Chip Client Base... 8 National Coverage... 9 Scalable Business Model and Referenceability Margin Expansion Growth Opportunities ASG is Benefiting from Selective Outsourcing New Contracts Would Provide Significant Upside Scenario Analysis Gaining Market Share High Calibre Contracts Booked in Q Valuation PE Multiple Comparison DCF Financial Forecasts Aggregate Profit & Loss Revenue Breakdown Managed Services Project Services Balance Sheet Cash Flow Investment Risks Labour Shortages Contract Losses

3 Summary and Investment Highlights Investment Highlights FY 06 FY 07E FY 08E FY 09E Operating Revenue $m EBITDA $m EBIT $m Adjusted NPAT $m Adjusted EPS cps Adjusted EPS growth % 47% 40% 47% 8% Adjusted P/E X PEG X DPS cps Franking % 100% 100% 100% 100% Dividend Yield % 3.2% 3.9% 5.0% 5.9% EV/EBITDA X P/OCF X ROIC % 10.8% 14.2% 19.6% 20.9% Source: Company reports, Veritas Securities We believe ASG is well placed to leverage the current shifts underway within Australia s IT outsourcing industry. This is primarily being driven by selective outsourcing, in our view. The break-up of large, big-bang style IT contracts, that dominated the 1990s, into smaller components spread across a number of service providers is benefiting tier 2 suppliers, such as ASG, who can now bid for more projects in their own right. This is being underpinned by a strong market for outsourced IT services where the pipeline of tender opportunities for new projects is expected to reach A$7bn in ASG s current share of <1% of total industry revenue suggests that there is plenty of scope for further strong growth in the near term. We are forecasting earnings growth of +40% in FY07 and +47% in FY08. This is above the market average of 17.1% in FY07 and 15.5% in FY08 for ex-100 companies over the next 2-years. Specifically, we do not believe that recent project wins (including QAN, APEC and Ericcson) are being reflected in ASG s market valuation. Further, our earnings estimates only reflect contracts already won by ASG. Our forecasts assume no new IT managed services contract wins beyond H107. This coupled with the extent of annual recurring revenues (i.e. circa 70% of annual revenue is repeated in the following year) leads us to believe that there is a high degree of earnings certainty attached to our existing forecasts. We have also provided three different scenarios in addition to our base case earnings estimates to highlight the potential earnings upside if ASG were to successfully win $10m p.a., $15m p.a. or $20m p.a. of new, contracted revenue in each of FY08 and FY09 respectively. Our target price is set in relation to ASG s IT services peers. ASG trades at an unwarranted circa 16% discount to its peer group in Australia i.e. OKN, SMX and DWS - on a FY08 PE. Given strong EPS growth forecasts over the next 2-years and a high - 3 -

4 degree of earnings certainty, we believe that ASG should trade at the peer equivalent PER. This provides a target price of $1.20 per share. Upside to our target price is likely should ASG successfully win new projects and/or undertake EPS accretive acquisitions. Current Trading Peer PE Comparatives ASX Code Price FY 07E FY 08E OKN $ SMX $ DWS $ ASZ $ Average of Peers Weighted Average of Peers ASZ (Discount)/Premium to Peers -2% -16% Target Valuation: ASG Adjusted EPS $0.07 Target PE 16.3 Target Price $1.20 Source: Thomson Financial, Veritas Securities Company History ASG was formed in Perth, WA in 1996 under the name Amcon Solutions Pty Ltd. In March 2003, ASG agreed to merge with esec Ltd, an ASX listed technology services company. ASG commenced trading on ASX from 1 st July In October 2003 ASG was awarded a 6-year $25m contract with Alinta (ALN.AX) in Victoria, its first major corporate contract outside of WA. In November 2003 ASG strengthened its east coast presence by acquiring ASSIST Pty Ltd, an Oracle solutions and services company with offices in Sydney, Melbourne, Canberra and Brisbane. ASSIST was established in 1994 to provide a range of Oracle-based consulting, implementation and support services to government and corporate clients. ASG strengthened its national presence and service delivery capability further in December 2004, acquiring Canberra-based Exceed Systems Integration Pty Ltd. Exceed was established in 1996, focusing mainly on federal government IT contracts. Exceed had 85 staff and turnover of $9m at the time of acquisition. In November 2006 ASG announced the acquisition of Sydney-based Oracle solutions and managed services provider Vindaloo Systems. Vindaloo had 45 Oracle consultants at November with the acquisition consideration based on 4.75x EBIT. The final acquisition price is likely to be around $6m to $10m and dependent on earn-out targets being achieved over the next two years

5 Company Overview Design Architecture Consulting IT Service Management Implement Business Solutions Oracle ebusiness Suite implementation Oracle managed application services Customised Oracle training services Discover reporting solutions GST toolkit Archive and purge toolkit Professional Service Project services Microsoft professional services Support Managed Services Help desk Desktop services Server management Dbase admin Disaster recovery Network management Security management Specialist Technical Services ASG provides outsourced information technology solutions to over 150 medium to large scale-enterprise and government clients. ASG is considered a tier 2 IT service provider (SP) and competes with both full-service multinationals and locally based niche SPs. ASG is capable of providing selective and/or full end-to-end outsourcing IT solutions including the people, processes, tools and methodologies required to deliver an outsourced solution. ASG provides services using a combination of onsite, local and remote (via the ASG National Service Centre) personnel. The company s suite of services includes the following: 1. Infrastructure and applications management outsourcing; 2. Oracle ebusiness suite implementation and support; 3. Applications development; 4. Business intelligence solutions; 5. Systems integration; 6. IT security; and 7. Specialist technical services. ASG is an Oracle Certified Advantage Partner and a Microsoft Gold Certified Solution Partner. It is also one of the largest Australian-owned IT outsourcing companies with 500 staff employed throughout offices in Perth, Sydney, Canberra and Melbourne as well as a remote Brisbane presence. These offices are segmented across 3 standalone regions as part of the ASG corporate structure. ASG Services Overview Managed Services ASG Manged Services Suite Source: Company reports - 5 -

6 1. Help desk services ASG provides 24x7 year-round system support services for all managed service clients through the ASG National Service Centre (NSC) in Perth, WA. A typical ASG customer has over 1,000 help desk seats that are managed using the HP OpenView desktop management solution suite. 2. Desktop services ASG provides both desktop and LAN management services including equipment (hardware and software) installation, configuration and testing. Support for these services is delivered by the NSC using enterprise desktop management solutions. 3. Server management Server management services comprise monitoring, incident management, problem management, capacity planning, backup and recovery. ASG s suite of services is provided by teams of technicians along IT Infrastructure Library (ITIL) guidelines. 4. Database administration Database administration (DBA) outsourcing involves services related to the daily management of DBA. These services include installation and configuration, 24x7 monitoring and problem resolution, connectivity, security and user management, capacity and other performance management services. 5. Disaster recovery ASG provides disaster recovery solutions using customer supplied and third-party data centres. ASG s data centre capability spans all five Australian major capital cities. 6. Network management ASG provides a range of network management services including installation, configuration and support of both Wide Area Network (WAN) and Local Area Network (LAN) environments. 7. Security management ASG has the ability to operate, maintain and administer all security infrastructure including firewalls, VPN solutions, filtering and security related software, hardware and cabling. Business Solutions ASG designs, develops, integrates and implements a range of business process solutions for a customer base of over 70. Solutions are typically Oracle orientated and include Oracle e-business suite implementation, a range of Oracle managed application services (including DBA management, application support, service desk and on-site support and coordination), customised Oracle training services, Oracle Discoverer Reporting and GST Toolkit. ASG provides the people, processes, tools and - 6 -

7 methodologies for managing, enhancing, maintaining and supporting the business process solutions. Microsoft Professional Services ASG is a provider of Microsoft Professional, Project and Managed Services. Its Partnered status reflects ASG s large staff of MS Certified Professionals and Systems Engineers. ASG has the ability to provide the end-to-end lifecycle of Microsoft-based IT solutions, from development to managed services for ongoing support. Specialist Technical Services This capability aims to provide customers with a completely outsourced system infrastructure management solution and/or supplement existing technical staff such as database administrators, systems administrators and network administrators. Investment Positives A Defensive IT Company ASG derives about 70% of annual sales from managed IT services that are typically contracted and long term in nature. Contract terms range from 3 to 10 years and in many cases have options to renew for similar periods. The average contract length is 4 years. ASG s role in an outsourced managed services environment is to take over the customers IT department, providing ongoing support and maintenance services which ensure that IT systems perform to business expectations on a daily basis. We consider this style of work as essential, largely non-discretionary and part of an organisations operating budget. In contrast, ASG s ASX-listed IT services peers, including Oakton (OKN), SMS Management and Technology (SMX) and DWS Advanced Business Solutions (DWS), derive a large proportion of earnings from providing services for projects that are typically at the design stage (e.g. consulting) or are undergoing implementation/integration and testing. This style of project work is largely discretionary and short term in nature, in our view. As a result, the decision to defer spending on new IT projects during a deteriorating economic environment impacts ASG s peers more severely. Earnings from these SPs is therefore more cyclical and less predictable. ASG claims that the contracted nature of its earnings results in about 70% of annual sales recurring in the following year despite short term swings in the demand environment. ASG deems this its Cumulative Revenue Model

8 Cumulative Revenue Model FY 09E FY 08E FY 07E FY Existing Contracts New Contracts/Renewals Projects Source: Veritas Securities, Company reports Contract Pricing ASG has a two pronged approach to contract pricing. This consists of the following: Cost plus whereby ASG typically adds a gross margin of 25% to 30% to the estimated cost per unit of resource provided; and Fixed contract pricing where ASG s margin is fixed and dependent on specific Service Level Arrangements (SLAs). Typically included in the contract terms is some scope to pass through higher staff and other operating costs. ASG s ability to pass-on these costs, to a large extent, de-risks its fixed price contract model, in our view. Blue Chip Client Base Revenue Breakdown 29% 40% 31% Corporate Federal State Source: Company reports - 8 -

9 ASG s customer base is diversified across 150 clients from various industry sectors as well as state and federal government departments. The client base is broadly based with 40% of revenue from corporates, 31% from federal government and 29% from state governments. At the corporate level ASG s customers consist of large, high calibre Australian companies and/or Australian-based foreign subsidiaries. The company does not specifically target Small to Medium Businesses (SMBs). A typical desktop/support service provided by ASG for example would comprise >1,000 seats. ASG s largest customer by revenue contribution is the WA Office of Shared Services (OSS). We estimate that OSS provides A$9m to A$10m or 12% of ASG s annual service revenue. We also estimate that ASG s top 3 customers account for about 25% of annual sales. Client Make-up by Industry 27% 8% 2% 3% 18% 1% 28% 13% Education Energy & Utilities Federal Govt Financial Services Healthcare Resources Retail State Govt Source: Company reports, Gartner National Coverage Headcount Breakdown 13% 22% 45% 20% WA NSW ACT VIC - 9 -

10 Staff break-down: WA 225 NSW 100 ACT 111 VIC 65 Total 501 Source: Company reports ASG has a footprint in all major Australian capital cities including Sydney, Melbourne, Perth, Canberra and Brisbane. In particular, ASG has aggressively expanded its services capability into the eastern states over the past 2-years through acquisitions and establishment of regional head offices to drive organic growth initiatives. Geographically, about 45% of revenue is derived from WA, 26% from ACT and 30% together from NSW and VIC. Recent contract wins in NSW (i.e. Qantas, APEC, Ericsson) as well as the Vindaloo acquisition should push the total revenue contribution from the east coast to >70% in FY08. The re-weighting of revenues to the east coast has also led to a reallocation of resources. For ASG this is people. We estimate that 55% of ASG s staff is now based throughout the east coast. We believe that Sydney and Melbourne provide the greatest growth opportunities for ASG. Despite lacklustre economic growth in these states in recent years total industry revenue remains largely in NSW and VIC. This is owing to the concentration of industry in NSW and VIC. An IBIS World report recently found that NSW accounted for 44% of industry revenue and employees respectively. Victoria was second, accounting for 30% of revenue and employees respectively. Scalable Business Model and Referenceability ASG s business model is scalable with limited capex required to fund growth. ASG has three established regional offices i.e. Western (WA), Northern (NSW, ACT and QLD) and Southern (VIC) that operate autonomously with about 500 staff. ASG s existing infrastructure appears sufficient to support a much larger workforce we estimate >1000 staff - without any major capital expenditure required. The separate regional structure also appears to be working well with a number of large contracts won over the past 2-years. This has led to scale efficiencies as well as improved margins and profitability. Greater market presence, especially on the east coast, has given ASG the reference sites it requires to pursue larger and sometimes more complex projects than it would previously have the scope to target. The recent 3-year agreement with QAN to provide system integration and management services is an example, in our view. We believe that ASG is likely to target new contracts in the A$35m p.a. value range as it continues to build referencability and scale. This is up from contracts valued at A$10m to A$15m p.a. which have been ASG s previous focus

11 Margin Expansion We forecast EBITDA margin expansion of 50bps to 12.6% in FY07, 140bps to 14.0% in FY08 and 40bps to 14.4% in FY09. This is expected to be driven by operating leverage as sales growth exceeds costs increases. We note however that the awarding of new contracts and in particular large ones (+$5m-$10m p.a.) does typically have a short term negative impact on operating EBITDA margins during the ramp-up phase. We define ramp-up as the lag time from when a contract is won to when it begins contributing to earnings. Scale efficiencies should also underpin margin growth over time. We believe that this will arise from greater automation, and subsequently standardisation, in the delivery process of managed services. Greater automation will be driven by a growing customer base. For example, a managed service solution previously delivered to the W.A Department of Health could be replicated (with some tailored changes depending on the customer) and delivered to the same department in another Australian state and/or territory. This higher degree of automation would help to reduce operating costs and increase operating margins, while bringing ASG s delivery capability to that in line with world s best practice. Growth Opportunities ASG is Benefiting from Selective Outsourcing The Australian IT services market is mature with most major IT outsourcing service providers well-established in the domestic market for a number of years. Service providers (SPs) are typically segmented into two tiers. Tier 1 SPs are the large multinational organisations, including Accenture, IBM, EDS, CSC and HP, that have traditionally dominated the Australian market by both number and value of contracts held. Tier 2 SPs are defined as either multinationals with limited local market presence,.e.g. Unisys, Fujitsu, LogicaCMG, Indian or Australian-owned IT outsourcers such as ASG and Telstra subsidiary KAZ. ASG is benefiting from the selective outsourcing trend whereby large IT outsourcing projects are no longer contracted to one supplier previously a tier 1 SP but are broken-up among multiple suppliers. The selective outsourcing trend has been driven largely by unsatisfactory outcomes with regard to single-supplier IT outsourcing. Some of these outcomes included poor realisation of targeted cost efficiencies and/or a lack of flexibility by the services vendor. Another driver has been the expansion of spending on outsourcing solutions as a way of addressing business challenges faced by a particular organisation. Smaller contracts have allowed a greater number of tier 2 SPs to bid for contracts in their own right. ASG s local presence and flexibility versus tier 1 SPs, which are seen as being beaurocratic and inflexible, is a key service differentiator that is helping the company win a greater number of long term outsourcing contracts as well as shorter term project-based work. Another advantage that ASG has is its lower internal cost structures compared to tier 1 SPs. This provides obvious pricing advantages. ASG estimates that it is priced 10% to 20% below tier 1 SPs at the helpdesk level and 30% to 40% below at the Oracle applications level

12 New Contracts Would Provide Significant Upside Our earnings forecasts in FY07, FY08 and FY09 incorporate only managed services business already won by ASG as at H107. We have not assumed any additional contract wins beyond H107 despite the solid pipeline of upcoming opportunities available as well as ASG s successful track record of winning new projects. This is mainly due to the difficulty in predicting the magnitude of contract values and the long lead times from tender stage to conversion. However, we have provided a scenario analysis below that attempts to highlight the potential upside to our base case estimates if ASG were to successfully convert new contracts of varying values over the next 2-3 years. Scenario Analysis Scenario Assumptions and Valuation Outcome Sumamry PE Valuation TCV* ($m) Contract Term New Headcount DCF FY08E FY09E Scenario $1.17 $1.24 $1.23 Scenario $1.21 $1.26 $1.28 Scenario $1.26 $1.28 $1.32 *total contract value Source: Veritas Securities Scenario 1 - $10m p.a. of New Contracts in FY08 and FY09 Scenario 1 Outcomes FY 08E FY 09E FY 10E Old New % Change Old New % Change Old New % Change Sales $m % % % EBITDA $m % % % EBITDA margin % 14.0% 14.3% 14.4% 15.2% 14.4% 15.5% Adjusted NPAT $m % % % Adjusted EPS cps % % % Source: Veritas Securities Scenario 1 assumes that ASG will successfully win $10m p.a. of new contracts in FY08 and FY09 respectively. We have also assumed that this will be split equally between H1 and H2. Based on a charge-out rate of circa $150,000 per consultant, we have assumed that a total of 34 new consultants will be hired in FY08 and FY09 respectively. The Scenario 1 Outcomes table above illustrates the upside to our current earnings and operating margins forecast in FY08-FY10 should this scenario be achieved by ASG

13 Scenario 2 - $15m p.a. of New Contracts in FY08 and FY09 Scenario 2 Outcomes FY 08E FY 09E FY 10E Old New % Change Old New % Change Old New % Change Sales $m % % % EBITDA $m % % % EBITDA margin % 14.0% 14.4% 14.4% 15.4% 14.4% 15.7% Adjusted NPAT $m % % % Adjusted EPS cps % % % Source: Veritas Securities Scenario 2 is derived through the assumption that ASG will win circa $15m p.a. in new contracts in FY08 and FY09 respectively. We estimate that this outcome would result in an additional 50 hires over the next two years. The Scenario 2 Outcomes table above illustrates the differential to our current earnings estimates should ASG achieve this outcome over the next 2-3 years. Scenario 3 - $20m p.a. of New Contracts in FY08 and FY09 Scenario 3 Outcomes FY 08E FY 09E FY 10E Old New % Change Old New % Change Old New % Change Sales $m % % % EBITDA $m % % % EBITDA margin % 14.0% 14.6% 14.4% 15.7% 14.4% 15.9% Adjusted NPAT $m % % % Adjusted EPS cps % % % Source: Veritas Securities Scenario 3 is derived through the assumption that ASG will win circa $20m p.a. in new contracts in FY08 and FY09 respectively. This would result in 66 new hires over FY08 and FY09. The Scenario 3 Outcomes table above illustrates the differential to our current earnings estimates should ASG achieve this outcome over the next 2-3 years

14 Gaining Market Share We estimate that ASG s total share of Australia s IT outsourcing revenue is <1%. Despite strong growth in the number of multi-vendor contracts in recent years, tier 1 SPs remain dominant in terms of share of total value and number of IT outsourcing contracts. Accenture, IBM, EDS, CSC and HP are the largest providers accounting for >50% of total industry revenue in Australia (IBIS World). The remainder is shared among the tier 2 SPs, including Australian providers such as ASG. Given the trend toward selective outsourcing we believe there is scope for ASG to strengthen its market position in coming periods. In our view, this is likely to occur regardless of the demand environment such is the shift towards selective outsourcing. Organic growth opportunities include the circa $7bn in new outsourcing contracts (according to IDC) that are expected to be presented for tender in This should be underpinned by ASG s growing national presence and acquisitions. Management has a track record in successfully finding, executing and integrating complementary acquisitions, e.g. ASSIST, Exceed and Vindaloo, over the past 3-years. High Calibre Contracts Booked in Q1 07 At the recent AGM in November 2006, ASG outlined that A$30m in contracted revenue had been booked in Q107. A large proportion of this is owing to 3 recently awarded contracts, including: QAN ASG has been awarded a contract to provide IT systems and integration management services for Qantas Airways over a 3 year period. The contract will be delivered out of ASG s Northern region in Sydney. We expect the contract to contribute revenues of between $8m-$10m p.a. once fully implemented from FY08; Department of the Prime Minister and Cabinet ASG is contracted to provide IT systems integration and management services for the Asia-Pacific Economic Cooperation (APEC) 2007 Taskforce. ASG will provide mainly desktop support services, project management and integration services to both stationary and mobile locations as APEC travels throughout Australia in The contract is expected to operate for a period of 3-years, comprising of rampup/operational/and wind-down stages; and Ericsson ASG will provide IT infrastructure managed services including service desk, server and desktop services for one of Ericsson s major corporate customers over a 3-year period

15 Valuation We value ASG at $1.20 using PE relatives. ASG Peer PE Comparatives ASX Code Price FY 07E FY 08E OKN $ SMX $ DWS $ ASZ $ Average of Peers Weighted Average of Peers ASZ (Discount)/Premium to Peers -2% -16% Source: Thomson Financial, Veritas Securities ASG Valuation June year-end FY 07E FY 08E Current share price $1.01 Adjusted EPS Adjusted EPS growth 40% 47% IT Services Peer PE ASZ Adjusted PE* Relative PE 98% 84% Target PE 16.3 Target Relative 100% Target Valuation $1.20 Source: Thomson Financial, Veritas Securities PE Multiple Comparison We use FY08 as a basis for deriving our 12-month target valuation. ASG trades at an unwarranted circa 16% discount to its peer group in Australia comprising OKN, SMX and DWS - on a FY08 PE. Given strong EPS growth forecasts over the next 2-years and a high degree of earning certainty, we believe that ASG should trade at the peer equivalent FY08 PER of 16.3x

16 DCF Our DCF valuation is $1.07. We note however that our DCF does not capture potential value adding contracts that may be won over the long term. Nor does it reflect contract roll-offs or potential contract losses that ASG may suffer over time. DCF Valuation $'000s FY 07E FY 08E FY 09E FY 10E FY 11E FY 12E FY 13E FY 14E FY 15E FY 16E FY 17E Terminal Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 EBITDA 10,228 15,003 16,741 17,824 Change in Working Capital -1,520-1, Tax Paid -2,597-4,036-4,565-4,889 Capital Expenditure -2,500-2,500-2,500-2,500 Free Cash Flow 3,611 7,345 10,026 10,246 10,656 11,082 11,526 11,987 12,466 12,965 13,484 13,484 Per Share WACC Assumptions NPV of Cash Flows $0.50 RF 6.0% Terminal Value $0.52 EMRP 5.5% Net Cash (Debt) $0.05 Cost of Equity 12% Total $1.07 Cost of Debt 5.6% Beta Target 1.0 D/E Target 20% WACC 10.3% Terminal Growth 3.0% Source: Veritas Securities Financial Forecasts Aggregate Profit & Loss We anticipate strong revenue and earnings growth over the next three years driven by a solid contract pipeline, strong IT services market, Vindaloo and the general trend to selective outsourcing. Our forecasts imply 37% revenue growth in FY07, 32% in FY08 and 9% in FY09. Our FY09 estimates assume no new contract wins beyond business already won. Strong top-line growth is expected to be accompanied by EBITDA margin expansion, driven by ASG s scalable business model. EBITDA is forecast to grow by 42% in FY07, 47% in FY08 and 12% in FY09. Aggregate Profit and Loss June year-end FY 06 FY 07E FY 08E FY 09E Revenue from Services 56,068 78, , ,068 Revenue from Goods 3,181 3,181 3,181 3,181 Total Revenue 59,248 81, , ,249 46% 37% 32% 9% Total Operating Costs 52,056 71,208 92,109 99,

17 % growth 43% 37% 29% 8% EBITDA 7,192 10,228 15,003 16,741 % Margin 12.1% 12.6% 14.0% 14.4% % growth 66% 42% 47% 12% Total D&A -1,285-1,494-1,508-1,533 EBIT 5,907 8,733 13,495 15,208 % margin 10% 11% 13% 13% Interest Income Interest Expense EBT 5,719 8,656 13,454 15,218 Adjusted tax expense -1,716-2,597-4,036-4,565 Tax rate -30% -30% -30% -30% Adjusted NPAT 4,003 6,059 9,418 10,653 % growth 76% 51% 55% 13% Source: Veritas Securities Revenue Breakdown We have attempted to separate ASG s revenue into 3 components, i.e. managed services, project services and product. We have assumed that managed services will provide circa 70% of total services revenue and account for circa 75% of billable/revenue generating staff with the balance from project related services. Product related revenue is forecast to make-up only 3% to 4% of total revenue over the FY07-FY09 period. Managed Services Managed Services Drivers June year-end FY 06 FY 07E FY 08E FY 09E Managed Services Avg headcount % growth 40% 17% 0% Service Revenue per head % growth 21% -2% 13% 5% Managed Services Revenue 39,248 53,983 71,519 74,832 % growth 48% 38% 32% 5% NB. FY07 decline is due to only 6 month contribution from Vindaloo Source: Veritas Securities, Company reports

18 We estimate strong revenue growth of 38% in FY07, 32% in FY08 and 5% in FY09 from managed services. This is driven by recent contract wins, in particular increased penetration in the Sydney market, and the Vindaloo acquisition. As a result, we estimate that average billable headcount will rise by 40% in FY07 and 17% in FY08. Our forecasts do not assume that any new contracts are won or existing ones lost beyond FY07. As a result, we consider our current estimates largely as a base case scenario and highlight the upside to our forecasts should ASG win new contracts going forward. Project Services Project Services Drivers June year-end FY 06 FY 07E FY 08E FY 09E Project Services Avg headcount % growth 48% 18% 13% Service Revenue per head % growth 25% -2% 13% 5% Project Services Revenue 16,820 24,271 32,411 38,236 % growth 48% 44% 34% 18% NB. FY07 decline is due to only 6 month contribution from Vindaloo Source: Veritas Securities, Company reports Revenue from project services is also expected to grow strongly driven by a continuation of buoyant demand for IT related services and selective outsourcing. We forecast revenue growth of 44% in FY07, 34% in FY08 and 18% in FY09. Balance Sheet Balance Sheet June year-end FY 06 FY 07E FY 08E FY 09E Current Assets Cash Assets 3,143 8,220 10,324 17,133 Receivables 13,723 18,971 23,229 24,045 Inventories Current tax assets 4,393 4,393 4,393 4,393 Other 719 1,043 1,260 1,348 Total Current Assets 22,037 32,771 39,378 47,100 Non Current Assets Other Financial Assets Plant and Equipment 2,532 2,430 2,366 2,324 Intangibles 29,289 32,306 36,363 39,372 Total Non Current Assets 31,832 34,748 38,740 41,707 TOTAL ASSETS 53,869 67,519 78,117 88,

19 Current Liabilities Payables 12,681 16,707 19,819 20,965 Interest-Bearing Liabilities 1,148 1,148 1,148 1,148 Provisions Current Tax Liabilities 2,010 2,010 2,010 2,010 Other Total Current Liabilities 16,553 20,486 23,716 24,908 Non Current Liabilities Interest-Bearing Liabilities 1,480 1,480 1,480 1,480 Provisions Total Non Current Liabilities 1,883 2,088 2,238 2,310 TOTAL LIABILITIES 18,436 22,574 25,955 27,219 NET ASSETS 35,433 44,945 52,163 61,589 Source: Veritas Securities, Company reports ASG s balance sheet is undergeared, in our view. ASG had net cash of $0.5m in FY06. It undertook a capital raising in November 2006, which raised $4m to fund the acquisition of Vindaloo and provide working capital. Given ASG s solid financial position and strong cash generation, we believe there is scope for further acquisitions over the next months, subject to appropriate opportunities arising. Cash Flow Cash Flow June year-end FY 06 FY 07E FY 08E FY 09E Cash flows from Operating EBITDA 7,192 10,228 15,003 16,741 Ch in working capital: (increase)/decrease in working capital -1,521-1,520-1, Dividends received Interest received Borrowing costs paid Income tax paid ,597-4,036-4,565 Net Cash from operating activities 4,571 6,033 9,804 12,536 Cash flows from Investing Payment from PPE ,000-1,000-1,000 Proceeds from sale of PPE Payments for subsidiaries ,910-3,000-2,000 Payments for IP -1,195-1,500-1,500-1,500 Net cash from investing activities -2,756-4,410-5,500-4,500 Cash flows from Financing Proceeds from borrowings Repayment of borrowings -1,

20 Finance lease payments Proceeds from share raising 1,311 7,453 3,528 5,944 Dividends paid -2,484-4,108-5,704-7,163 Net cash from financing activities -2,210 3,345-2,176-1,219 Net increase/(decrease) in cash ,969 2,128 6,817 Cash at beginning of financial period 3,538 3,143 8,220 10,324 Cash at end of financial period 3,143 8,112 10,348 17,141 Source: Veritas Securities, Company reports ASG s limited capex requirements makes it a strong cash generator. We note that there is some working capital build-up in the implementation stages of large contracts as these projects begin to ramp-up. Any negative impact on cash flow however is only short term Investment Risks Labour Shortages The risk of short term labour constraints remains our primary concern. Pent up demand for IT services over the past 2 years and a shortage of newly qualified IT staff is placing pressure on employers to fill vacant positions. The recently released Hudson quarterly Employment Expectations survey found that 46.8% of IT employers plan to increase permanent staff during the March 2007 quarter, up 5.7% over pcp. We believe that employers in certain parts of the IT market will have difficulty in sourcing and attracting skilled staff. The parts of the market most at risk, according to the Australian Information Industry Association (AIIA), are SAP, Java, e-business, Network Security, Linux and.net related skills. While ASG is also finding it more difficult than previously to find appropriate staff, we believe that risks of shortages in the managed services space are not as profound as the specialist skills mentioned by the AIIA. Further, we note that ASG is taking appropriate steps to address potential skills shortages such as bringing HR functions in house and pursuing overseas recruitment drives. Contract Losses The loss of large contracts would negatively impact ASG s earnings and growth trajectory. We note, however, that the average contract term is currently 4 years and that the customer base is well diversified with the largest client accounting for circa 12% of annual revenue. We also note that ASG maintains a strong contract retention record with only 2 small contracts lost in FY

21 ASG Group (ASZ.AX) Analyst: Ramoun Lazar Profit & Loss Market Measures Year ending June 2006A 2007E 2008E 2009E Year ending June 2006A 2007E 2008E 2009E Revenue: EPS reported cps services EPS adjusted cps product EPS growth % 47% 40% 47% 8% Total revenue PE multiple x Expenses PE relative (ex-100) % 145% 122% 97% 99% EBITDA EBITDA per share cps D&A EBITDA growth % 66% 42% 47% 12% EBIT P/OCF x Net interest expense FCF per share $ EBT DPS cps Tax Dividend yield % 3.2% 3.9% 5.0% 5.9% Adjusted NPAT Franking % Non-recurring items Enterprise value $m Reported NPAT EV/EBITDA x Cashflow Profitability & Liquidity Ratios 2006A 2007E 2008E 2009E Year ending June 2006A 2007E 2008E 2009E EBITDA ROE % 11.3% 13.5% 18.1% 17.3% Change in Working Capital ROA % 11.1% 14.1% 19.2% 20.5% Net Interest NPAT/sales % 6.8% 7.4% 8.8% 9.2% Income taxes paid & other EBITDA/sales % 12.1% 12.6% 14.0% 14.4% Cashflow from operations Interest cover x nm Capex Gearing (ND/[ND+E]) % -1% -14% -17% -31% Total free cashflows NTA/share $ Other investing cashflows Proceeds/(repay) of borrowings Valuation Equity raisings/(buybacks) $m $/share Dividends paid NPV of Cash Flows 62.2 $0.50 Net change in cash Terminal Value 65.7 $0.52 Net Cash (Debt) 5.6 $0.04 Balance Sheet Total $ A 2007E 2008E 2009E Cash Price target* $1.20 Debtors Upside/downside 19% Other current assets *PE methodology x FY08E adjusted eps Current assets PPE WACC Intangibles Risk free rate of return 6.0% Other non-current assets Post-tax cost of debt 5.6% Non-current assets Equity risk premium 5.5% Total assets Beta target 1.0 Cost of Equity 11.5% Payables Terminal Growth Rate 3.0% Short term borrowings WACC 10.3% Other current liabilities Total current liabilities Company Statistics Long term borrowings Current share price $ps $1.01 Other non-current liabilities Ordinary shares m Total non-current liabilities Options m 18.9 Total liabilities Diluted market capitalisation $m $144.2 Net assets

22 Sales Research Tony Bonello Bryce Reynolds Robert Scappatura Kate Pike Clay Melbourn Stephen Murphy RATING Resources Piers Reynolds Industrials Ramoun Lazar Wassim Kisirwani BUY anticipated stock return is greater than 10% SELL anticipated stock return is less than -10% HOLD anticipated stock return is between -10% and +10% SPECULATIVE High risk with stock price likely to fluctuate by 50% or more This report has been issued by Veritas Securities Limited A.B.N , Australian Financial Services Licence Number Disclaimer. This research has been prepared based on reliable information for clients and provides general investment advice only and gives no warranty to the accuracy of the information provided. Veritas Securities does not take into account specific client s financial situation, particular needs and investment objectives. Veritas Securities recommends you consult your financial advisor before making any financial investment decision. Whilst this document is based on the information from sources that are considered reliable, Veritas Securities, its directors, employees and associates do not make any representation or warranty that it is accurate, complete, reliable or up to date. Veritas Securities does not accept any responsibility to inform you of any mater that subsequently comes to its notice, which may affect any of the information contained in this document. Veritas Securities does not accept any liability whatsoever for any loss or damage suffered by any person direct or indirect derived from information or advice contained in this research. Disclosure of interest. Veritas Securities may or has received fees, commissions and brokerage by acting as corporate advisor or broker for Company s described in this report. Veritas Securities and its employees may hold an interest in financial products described in this report and may benefit from an increase in the price or value of them. The research analyst who prepared this document does not hold shares in ASG Group Ltd. Veritas Securities Limited A.B.N AFSL No GPO Box 4877, Sydney, NSW, Sydney Level 4, 175 Macquarie Street Sydney, NSW, 2000 Tel: (02) Fax: (02) Melbourne Level 8, 350 Collins Street Melbourne, VIC, 3000 Tel: (03) Fax: (03) Perth Suite 5, 531 Hay Street Subiaco, WA, 6008 Tel: (08) Fax: (08)