DAISY GROUP Plc. BUY, TARGET PRICE 1.33, (upside 43.8%) October 30, 2012

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1 October 30, 2012 DAISY GROUP Plc BUY, TARGET PRICE 1.33, (upside 43.8%) Market data Stock price Shares nb diluted (m) Market value Net Debt adjusted 76.7 EV (mls) ISIN Market Analyst GB00B61G9L20 AIM-LSE P.Schang e 2014e 2015e Sales %growth 30.9% 10.0% 2.0% 2.0% EBITDA %margin 16.1% 16.2% 16.1% 16.0% EBIT %margin -3.8% 4.5% 4.6% 4.7% Net profit %margin -2.5% 2.4% 2.4% 2.5% Adjusted Net Profit Adjusted Margin % 10.0% 9.6% 9.6% 9.5% e 2014e 2015e PE Adjusted PE EV/Sales EV/EBITDA EV/EBIT Covered by Nfinance since October 30, 2012 Calendar November 30,2012 :H results Shareholder Voting Rights Invesco Perpetual Life Limited 25.5% Matthew Riley 23.0% Tosca Asset Management 17.0% Host Europe(Bermuda) Limited 13.7% Eton Park Capital Limited 9.6% Daisy Group Employee Benefit Trust 3.6% 92.3% Daisy Group Plc is a UK based company that provides unified business communication solutions to SME, mid-market and corporate businesses in UK. The company aims to serve as consolidated supplier and one point of contact for all the data, mobile, telephone systems and maintenance requirements of its customers. The company was formerly known as Freedom4 Group plc and Pipex Communications plc and was engaged in wireless broadband business. In July 2009 Daisy Communication and Vialtus Solutions Limited were acquired by Freedom4 plc. and Daisy Group was formed.. LATEST PRESS RELEASE COMMENTARY On June 19, 2012 the company declared its results for the year ending on March 31, Revenues for the year 2012 were up by 31% from 266 m 2011 to 349 m. The gross profit was up by 28% to 133 m. However, gross margin declined from 38.9% to 38.1%. Adjusted EBITDA increased from 40.7 m to 56.3 m thereby registering a growth of 38%. EBITDA margins also improved from 15.3% to 16.2%. Adjusted net income increased from 25.0 m to 34.8 m. Sales growth during H was 18% from m in H to 173 m and EBIT improved marginally from m to m. ANALYSIS The company has shown good growth in sales and EBITDA for the year However, H2 has been difficult for the company and the management attributes low growth in H2 revenues to difficult economic and trading environment. However, the company is improving its product portfolio and reducing its reliance on fixed line network services. The company has registered growth in revenue and gross profit in all its divisions retail, wholesale and distribution though increasing proportion of wholesale and distribution has impacted gross margins. The company also seems to capitalise on the track of consolidating and integrating various acquisitions made during the past 3 years. The management expects significant opportunity in increasing product penetration and cross-selling of its products. VALUATION At 5.2x EV/EBITDA 2012e vs average 6.7x for the peers and market price of 0.98 vs target price of 1.33 we believe that stock is undervalued. The target price is arrived by giving equal weight to DCF (price 1.24, WACC= 7.2% and terminal growth rate of 1%), peer comparison (price 1.19) and historical ratios ( 1.62). We initiate a buy rating with target price of 1.33.

2 SUMMARY... 3 GROUP PRESENTATION... 4 GROUP HISTORY... 7 INVESTMENT TRIGGERS... 8 Diversified portfolio of products... 8 Realisation of benefits of past acquisitions and expected growth from future acquisitions... 8 Organic growth through cross-selling and up-selling... 8 Reducing dependence upon fixed line calls and increase in revenue from mobile products:... 9 INVESTMENT RISKS... 9 Challenging economic and business environment :... 9 Risks associated with new acquisitions... 9 Increase in borrowings to pursue acquisition strategy VALUATION FINANCIAL OVERVIEW... 13

3 SUMMARY Daisy Group is a provider of unified suite of business telecommunication services across data, voice mobile, maintenance and telephone systems. The company provides business broadband, business mobile communications, telephone solutions, business call, line packages and business hosting solutions to small and medium enterprises. The services offered by the company are tailored and customized to meet the specific requirements of the customers. The company is having its own data centres in London, Southampton and Manchester. It is also having its own IP core network and transit and peering services. Some of the products of the companies are lines and calls, business mobile, business broadband, telephone systems, anti-spam, anti-virus, hosting solutions, SaaS etc. The company is having more than customers in SME business market in its retail segment. Its wholesale division is servicing more than 850 resellers and distribution division is having 250 dealers and more than connections.

4 GROUP PRESENTATION Daisy Group is a British company that provides unified communication services to business sector of UK. The head office of the company is located in Nelson and its 14 other offices are located across the UK. The company earns its revenue by providing solutions from its wide range of fully-customisable product portfolio. The company divides its operations into three divisions namely Daisy Retail, Daisy Wholesale and Daisy Distribution. Daisy Retail This division provides unified communications related to data, mobile, systems, maintenance and voice. Its customers include SME and mid-market customers. Daisy Wholesale This divisions provides managed billing software via own proprietary billing software besides unified communication services of data, mobile, systems and maintenance. The partners of the divisions are telecom resellers and carriers, small to medium ISPs and IT resellers. The customers of the division can get better pricing and more user-friendly portals than buying directly from carriers and ISPs. Daisy Distribution- This division sells mobile handsets and airtime tariffs from Vodafone, O2 and Orange. The customers of the division are mobile dealers. The following chart provides division wise sales for the year Around 71% of total revenue is contributed by retail division while remaining is contributed almost equally by wholesale and distribution division. The share of retail division in total revenue has come down from 74% in 2011 while that of wholesale division and distribution division has increased by 2% and 1% respectively. Divisionwise Revenue % 14% 71% Daisy Retail Dasiy Wholesale Dasiy Distribution

5 The products of the company can be broadly categorized into following categories- Data The company offers wide range of business class broadband and internet access solutions. These include IP-VPN, DSL-based services, Ethernet, security, VoIP solutions and hosting. Systems This product includes full ranges of business telephony systems. The products are accustomed to meet the requirements of customers. The range includes from PBX telephone system to hybrid VoIP solutions. The company supplies telephone system from suppliers like Mitel, Samsung, NEC, LG, Nortel and Avaya. Networks The company provide voices packages to meet the specific requirement of business enterprises. The service ranges from single analogue business lines to complex multi-site solutions. The company also offers Number Translation Services (NTS). Mobiles- The company is a partner of Vodafone and O2 and caters to mobile solutions requirement of customers according to requirement. The company also offers wide range of tariff packages. The share of these four types of products in total revenue is shown the below chart: Productwise Renenue % 40% 9% 20% Networks Data Systems Mobile The share of mobile division has increased from 24% in 2011 to 31% in 2012 while that of networks has decreased from 45% to 40%.

6 The company has worked on the strategy of consolidating the fragmented SME and midmarket communication sector. It has made 17 acquisitions since its restructuring in July 2009 and has transformed from a niche broadband business to provider of unified communications. The details of acquisition made by company since July 2009 are given below: Sr. No Month & Year Company acquired 1. July 2009 Vialtus 2. August 2009 ATC and Eurotel 3. September 2009 Aerofone and Redstone/Angila 4. February 2010 Managed Comms and BNS 5. April 2010 CRC 6. July 2010 Murphx and Fone Logistics 7. October 2010 Telstra 8. November 2010 Spiritel 9. December 2010 NEG 10. Feb 2011 OBit 11. March 2011 Outsourcery 12. April 2011 Telinet 13. April 2012 Worldwide Group Holdings

7 GROUP HISTORY The history and major milestones of company is narrated below- October 2002 The company was founded following reverse takeover of Zipcom plc by shareholders of Transigent Limited October 2003 Pipex acquired by GX Networks to create Pipex Communication plc April 2004 Pipex acquires Host Europe, a hosting outfit August 2004 Acquisition of Nildram by Pipex April 2005 Pipex acquires web host outfit Dohost October 2005 Purchase of Freedom to Surf by Pipex March 2006 Purchased fixed line business Homecall September 2006 Acquired Bulldog & Toucan Customer Base to scale up Broadband & Voice Division July 2007 Sale of voice and broadband business of the company to Tiscall UK Limited April 2008 Hosting and network services divisions sold in April 2008 April 2008 Remaining Pipex assets renamed Freedom Communication plc April 2008 Acquired BOZII, a provider of WiFi roaming services April 2008 Bought back 1489 million shares at pence per share for capital reduction. July 2008 The company was renamed as Freedom4 Group July 2009 Acquisitions of Daisy Communication Limited and Vialtus Solutions July 2009 Restructured its share capital by consolidating every 20 shares into 1 July 2009 The name of company changed from Freedom4 Group to Daisy Group plc Feb 2010 Sold WiFi business to its management team June 2010 Disposed of WiMAX spectrum licenses to UK Broadband Limited June 2010 Increase in revolving credit facility to 100 m to support its acquisition strategy June 2012 Launch of CloudSelect product July 2012 Selected to deliver communication services within the Government Procurement Service s Public Services Network(PSN) Services Framework

8 INVESTMENT TRIGGERS Diversified portfolio of services The company is having diversified range of products like data, voice, mobile, telephone systems and this enables the company to be one supplier and one point of contact for all business telecom and data requirements of the customers. This will enable the company to attract more customers as one supplier and one point of contact concept helps customers in savings of time and money and improvement in operational efficiencies. Realisation of benefits of past acquisitions and expected growth from future acquisitions The company has started realising benefits of past acquisitions in the form of increase in revenues, operational efficiencies and cost savings. As the UK telecom market catering to requirements of SME and mid-markets is fragmented, the companies focusing on SME and mid-markets are small in size. So Daisy Group with its increased size thanks to acquisitions can have advantage of garnering higher market share. After successful integration of past acquisitions, the company aims to further grow through new acquisitions by increasing customer scale and expanding product portfolio. The new acquisitions are expected to result in improved efficiencies and enhanced opportunities of cross-selling and up-selling. Organic Growth through cross selling and up-selling Cross selling refers to selling additional products to existing customers and upselling refers to up-gradation and add-ons by existing customers. Its wholesale business has been able to achieve increase in number of customer taking more than 3+ products to 21% in 2012 from 18% in The following chart also shows that there has been increase in number of resellers taking 2 products: 80% 60% 40% 20% 0% Percentage of resellers on the basis of number of products 63% 58% 19% 21% 18% 21% 1 proudct 2 products 3+ products

9 The chart given below shows the percentage of customers on the basis of number of products for the year. The number of customers taking more than 3+ products has increased from 20% to 22%. Percentage of customers on the basis of number of products 60% 40% 20% 44% 46% 36% 32% 20% 22% 0% 1 proudct 2 products 3+ products Reducing dependence on fixed line calls and increase in revenue from mobile The company is reducing its dependence on fixed line call and increasing the proportion of mobile in total revenue. Revenue from fixed line calls was 16% in 2012 as compared to 20% in Mobile products share has increased from 24% in 2011 to 31% in INVESTMENT RISKS Challenging Economic Environment: H performance of the company has been impacted by slowdown in economic and industrial activities. As the company mainly caters to the requirements of SME and midmarket business sector, the slowdown may also impact future performance of the company. The gross margin of its wholesale division has come down from 23.1% in 2012 to 20.7% in 2011 and retail division gross margin is down from 45.2% to 44.9%. Further increase in revenue form wholesale and distribution divisions at the cost of high-margin retail division is also expected to bring down margins. Risk associated with new acquisitions The company has successfully integrated past acquisitions but with further increase in number of companies acquired, the risks involved with integration rises. Further, the cost synergies expected from the acquisitions may also not materialise because of problems associated with integration.

10 Increase in borrowings to pursue acquisition strategy The company has spent nearly m on acquisitions since its reformation. The total borrowings of the company have increased form 28.3 m in 2010 to m in It has acquired Worldwide Group Holding in April 2012 for 28.0 m for which the funding of 25.0 is provided by Royal Bank of Scotland. Because of slowdown in the business and economy the company may not achieve the expected benefits of acquisition and debt costs may prove a drag on the financials.

11 VALUATION To arrive at the target price of Daisy Group Plc stock, we used combination of a DCF-based absolute valuation technique, relative valuation (peer multiples), and historical multiples. Each of the above was given 33% weight. Thus we obtained a weighted average price of Methods Weighting Stock price Peer comparison 33% 1.19 Historical ratios 33% 1.62 DCF 33% 1.24 Weighted average 1.33 PEERS COMPARISON 4 multiple ratios pertaining to 4 peer companies were used to compute a stock price at 1.19 /share by taking the average of the following prices: Name of Company EV/Sales EV/EBITDA P2B P/FCF KCOM Group plc Maintel Holdings plc AdEPT Telecom Plc Alternative Networks Plc Median Corresponding Stock Price Source; Annual reports of the company and 1. The EV/Sales multiple gives corresponding stock price at The median of peer s EV/EBITDA of 6.64 provides a corresponding stock price of Daisy Group at 1.11 per share. 3. The median P2B of peers is 2.53, resulting into corresponding stock price for the company at 1.53 per share. 4. Median P/FCF of peers at provides corresponding stock price of 1.06 for the company. By taking average of above 4 prices, we get a stock price on 1.19 /share on the basis of peer comparison.

12 DISCOUNTED CASH FLOWS Based on this DCF model, we get a stock price at 1.24 per share (WACC 7.2%, terminal growth rate +1.0%): Revenues revenue growth % 30.9% 10.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% EBIT margin % -5.9% -3.8% 4.5% 4.6% 4.7% 4.7% 4.7% 13.6% 13.4% 13.2% 13.1% Depreciation& Amortisation Capital Expenditure WCR change & Others Free Cash Flow Terminal value Discounted cash flow Discounted terminal value WACC assumptions Beta 0.62 Market premium 7.0% Risk Free Rate 3.5% Cost of Equity 7.8% Long-term Equity Weight 88% Cost of Debt 3.5% Long-term Tax rate 30% Tax Effected Cost of Debt 2.5% Long-term Debt Weight 13% WACC 7.2% Terminal growth 1.0% Forward diluted shares(m) 267.0

13 FINANCIAL OVERVIEW Profit and Loss account: 15 months P&L ( m) Dec-08 Mar-10 Mar-11 Mar-12 Revenue % growth 98.2% 30.9% Networks % growth 59.6% 14.8% Data % growth 122.3% 29.0% Systems % growth 128.8% 22.0% Mobile % growth 186.9% 66.5% EBIT % margin -15.6% -5.9% -3.8% Net Profit Net Profit Margin % -13.0% -2.9% -2.5% Adjusted Net Profit Adjusted Net Profit Margin % 5.1% 9.4% 10.0% The company has nil revenue for the year ending on December 2008 as there were no sales from the continued business. The revenue of the company has grown significantly from m in 2010 to m in The EBIT and net profit of the company is negative from 2010 to 2012 because of amortisation of intangibles. However net profit of the company after adjusting for amortisation (excluding software amortisation), share based payment costs, net exceptional operating costs and income tax credit has increased from 6.8 m in 2008 to m in The adjusted net profit margin has also increased from 5.1% to 10.0% during the same period.

14 Balance Sheet Balance Sheet ( m) Dec-08 Mar-10 Mar-11 Mar-12 Non-current assets: Goodwill Other Intangible Assets Property, plant and equipment Deferred Tax Assets Investment in joint ventures Current assets: Inventories Trade & other receivables Cash & cash equivalents Others Total Assets Current liabilities: Trade & Other payables Current tax liability Borrowings Provisions Non-current liabilities: Borrowings Equity Provisions & Others Total Liabilities Net Debt Major portion of non-current assets is accounted for by intangible assets which comprise 63% of total non-current assets. The major intangible assets of the company are customer lists, computer software, supplier relationships, licenses and intellectual property. In 2012, out of m of intangible assets, for is accounted for by customer lists. These customer lists have been calculated on the basis of expected discounted future cash flows and are written-off over a period of 3 to 7 years. Goodwill accounts for 32% of non-current assets and has resulted because of acquisitions done during past 3 years. It is not amortised but reviewed annually to consider whether any impairment is required. Trade & other receivables account for around 2/3 rd of total current assets. In current liabilities trade & other payables constitute major chunk of non-current liabilities. Total and net debt of the company has continuously increased from 2008 to 2012 because of raising of borrowing for acquisition financing.

15 Cash Flow statement Cash Flows ( m) Dec-08 Mar-10 Mar-11 Mar-12 Net Income Depreciation & Amortisation WC changes & others Operational cash flows Purchase of property, plant & equipment Purchase of intangibles Free cash flows CFF Operating cash flows of the company has continuously increased from 2008 to 2012, Purchase of intangibles include additions to computer software, customer lists and intellectual property. Regarding cash from financing activities the company made buyback of share for m in 2008 and issued ordinary shares for 78.5 m The net borrowings were 79.5 m in 2011 and 18.8 m in 2012.

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