Buy Nexus Management* at 0.8875p – Price Target 2.925p

	Key Data
	EPIC	NXS
	Share Price	0.8875p
	Spread	0.85p –0.925p
	NMS	25,000
	Total no of shares	841.51 million
	Market Cap	£7.47 million
	12 Month Range	0.6p –1.56p
	Net Cash and cash due	£2.6 million.
	Market	AIM
	Website	www.nexusmgmt.com
	Sector	Software and Computer Services
	Contact	Roger Richardson 01862 812 107

Nexus Management was founded in the UK in 1989 as a communication services company specialising in email solutions for small to medium businesses operating in Europe. The Company began operating within a remote management framework from 1995 onwards, using the internet and Virtual Private Networks (VPNs) to provide consulting and technical support services for SMEs regardless of location.

In 2002, the Company signed a co-operation agreement with AIM listed PC Medics with the objective of bringing together the technical knowledge and skills of Nexus engineers and the commercial skills of PC Medics. The collaboration allowed the establishment of a world class data centre in Brunswick, Maine with a full range of data centre services such as network monitoring, disaster recovery, online remote backup and email cleaning. The centre became a hub of worldwide operations for both companies and both benefited from a reduction in staffing levels as the two companies could now share the same staff. Today the company still operates from Brunswick as well as from its European offices at Dornoch in Scotland. Following a decision to refocus the Company to a Managed Service Provider specializing in the provision of IT services, Nexus was finally acquired by PC Medics in a reverse takeover in March 2005 and the combined group changed its name to Nexus shortly thereafter.

In April 2006, Nexus announced the acquisition of Fix IT Worldwide Limited, a privately owned UK IT services company generating annual sales of £630,000 and a small profit. The initial consideration was to be paid in shares at a valued of twice the 2005 net profits of Fix IT and a further two thirds was to be paid in shares conditional to the performance of Fix IT over the coming two years. Nexus believed that the acquisition would create attractive synergies creating a strong UK base for Nexus however the reality is that, to date, the group has failed to achieve a critical mass on this side of the Atlantic.

In August 2006 Nexus started to work closely with PD Financial via a marketing agreement and by making it a loan which it subsequently exchanged for shares in the American company. PD Financial markets electronics goods for a range of household names including Toshiba, Dell, Compaq, HP and Panasonic. The total investment made in PD by Nexus via converted loans and directly as equity is £1.6 million. To date Nexus has sold two thirds of its holding for £2.5 million and has generated net cash from its marketing arrangements with PD of more than £700,000.

NexMail

Nexmail is Nexus’s own brand managed email service and was originally designed for companies which needed to change their email message systems from Exchange Server 5.5 on Windows NT Service 4.0 as Microsoft had already retired support for these products. NexMail services range from initial user setup to the migration of email data to all necessary licensing. It allows for safe, secure and up to date email messaging that is both spam and virus free as Nexus will deal with virus attacks and other threats to the IT environment on behalf of the company, saving it valuable time. NexMail also provides the very latest Exchange facilities without a costly upgrade to Active Directory. In addition, Nexus can also provide email archiving for US companies should the client require it as part of the Sarbanes Oxley act.

Help Desk

Nexus helps companies maintain an effective help desk and provides quality IT support that is both more time and cost efficient than if the client company were to execute it itself. Nexus claims that it can reduce the workload of onsite technicians by around 60% leaving them more time to deal with more urgent tasks. The technical support provided by the Nexus Help Desk is tailored for the specific needs of the client and becomes the central point of contact for all IT inquiries including hardware, software, networks, laptop support and remote network access. Requests are assigned on a scale of 1-5 for severity, urgency and priority and dealt with accordingly.

Backup and Disaster Recovery

Nexus can provide online Managed Backup and Data Recovery services carried out via a single point of connection to the company’s network, application services, PC’s and notebooks which can be scheduled for automatic backup at regular intervals without disrupting business operations. It can relieve the responsibility from companies to manage their own daily tape backups and remove reliance on tape media – a process which typically has a 6% failure rate. Nexus will transfer data offsite to its world class Datacentre which is particularly effective for organizations with multiple or remote site locations.

Data Storage and Co-Location

The Nexus data centre in Maine offers customers a secure, safe data storage facility equipped according to best practice standards, with closed circuit monitoring, air conditioning, InergenTM fire suppression, two independent Internet access points, UPS and Diesel generator backup. Nexus solutions protect equipment from power failure, fire and intrusion, allowing the client to retain as much control as its business requires. Nexus has experienced high success rates associated with this service. Out of the 2500 client networks monitored by Nexus, less than 1% has suffered minor problems and less than 0.01% has suffered major problems.

PC Lifecycle Management

Nexus PC Lifecycle Management (PCLM) manages all IT assets in a company’s corporate network anywhere in the world from its Datacentre. The PCLM service can be fully integrated with existing IT infrastructure and thus can help companies achieve material cost savings. The system uses leading edge technology for automated data distribution in networks or via the internet and allows for easy distribution, installation and modification of all components of a PC work environment. The centralized inventory of all workstations, combined with a consolidated report and alarm management tools, provides the basis for helping organizations to ensure full transparency in their IT infrastructure.

Nexus Monitoring System (NMS)

The Nexus Monitoring System is a web based monitoring platform that will manage a company’s network and computers and correct problems before they become an issue. It features tests to notify Nexus administration when events occur to facilitate proactive problem resolution and prevent critical outages. Nexus staff can visually assess the health of the company’s network through a web interface and an intuitive colour coded representation of which servers are experiencing issues allowing for quick determination of what areas need immediate attention. The monitoring process can be enhanced with NMS Notification. This system will automatically notify designated contacts via email or pager.

Managed Anti-SPAM Service

Nexus has a managed email spam filtering and Anti-Virus System. The company claims that the elimination of this junk mail saves an average company 1 hour per week per employee – productive time which would otherwise have been wasted dealing with the spam. All emails are filtered through servers at Nexus’s Datacentre and relieves companies from having to install onsite equipment. 99.75% of spam is captured along with 100% if viruses. Less than 1% of spam missed and only 0.1% of emails are falsely marked as spam.

Nexus Management VoIP

The Nexus Voice over Internet Protocol (VoIP) solution drastically reduces the cost of expensive multi-national conference calls. Using a regular phone, Nexus’s solution figures the fastest and most economical way to complete a secure connection with recipients. It offers a managed VoIP service that allows conventional phones to make calls over the IP network in combination with the existing private branch exchange system of a corporation. Generally, all calls are routed over the IP network; however, if the network is down, they are automatically switched over to the regular telephone system. Cost savings of up to 90% are possible especially if conference calls between branch offices occur on a regular basis.

Nexus Discovery Report and Audit

With a Discovery Audit, Nexus utilizes a proven consulting methodology to assess an organisation’s existing IT infrastructure and deliver a package of recommendations based on the company’s needs. An audit consists of three phases: assessing the current state by systematically examining how well the organization meets its enterprise IT needs in accordance with its overall business strategy, defining future vision by developing a vision that incorporates present and future business needs and developing a road map which prioritizes the list of initiatives required to achieve this and defines a realistic approach for delivery.

PD Financial

The purchase of a stake in PD Financial and the marketing agreement between the two companies appeared to some to mark a change in strategy for Nexus in that it moved the company from the SME market into the B2C market. However the key point is that the services provided for customers of PD (a technical support helpdesk and back-up solutions provision) are also provided for the SMEs. Around 90% of the services requested by the SMEs are requested during the working day, Monday to Friday, but Nexus is obliged to maintain a 24/7 service. The vast majority of help requests from PD customers occur out of office hours, at weekends or in the evening. Hence Nexus is able to support PD customers simply by utilizing staff needed to provide the core Nexus product but at times when its services were under-utilised.

For the year ended 30th September 2007, PD Financial generated £17.0 million in revenues and £1 million in profits for Nexus. The previous marketing agreement generated cash of approximately £700,000 through the introduction of help desk customers via its sales channel. Nexus retains a 8.3% stake in PD and a new and improved perpetual marketing agreement is expected to boost the Company’s future trading performance.

Nexus has a clearly defined twin track strategy for growth.

In the United States it believes that its relationship with PD Financial will allow it to dramatically increase its penetration of the B2C market. As noted above, this can be achieved without a significant ramp up in the fixed cost base. Clearly, with only an 8.3% stake in PD Nexus now has limited control over the company and the uncertainty of PD’s credit arrangements and the appetite of American consumers to undertake debt funded purchases of white goods is somewhat uncertain. However the advantage of using PD is that Nexus can build up its client base without committing any marketing spend itself. Moreover the PD business model is inherently cash generative for Nexus in that customers pay for a year’s support contract upfront – the typical cost is $120  - so that although revenues are only recognised over 12 months, the cashflow is positive from day 1 of any agreement being signed.

Nexus is unlikely to sell its remaining stake in PD in the short term. PD now has heavyweight advisors in Lehman Brothers which, we interpret, as meaning that it is heading towards an eventual IPO. Nexus could have maintained its holding in PD as an asset play but its directors felt that UK investors did not attach great importance to the equity in PD and that the cash released in the short term could be better used for acquisitions which will be immediately earnings and value enhancing. The remaining stake in PD will, however, be maintained as a long term strategic investment.

In the United Kingdom, Nexus is determined to grow its presence in the highly fragmented SME market. The sector is unfashionable and purchases of unquoted companies typically take places at barely 5 times earnings or less. And with net cash plus equity to use as currency Nexus believes that it has real scope to act as a consolidator. We understand that the company is looking at a number of small bolt-on cash funded acquisitions where it will be buying a business without the need to take on its management. However, in the longer term, once the issues with PD have been resolved and Nexus’s share price is on a rating which reflects its underlying growth, the company is likely to use its equity to undertake rather larger deals.

Nexus operates with a seven man board below that has secured the services of a strong supporting team. The Board comprises:

Boris Adlam – Chairman of Nexus Inc, executive director of Nexus PLC, aged 41. Adlam joined the board of Nexus in 2001 as a non executive director. An investment banker and venture capitalist by background, Adlam began his career as a corporate financier with Lehman Brothers, Paribas Capital Markets and Nomura International plc. He left investment banking in 1999 to become a venture capitalist and co-founded Arcanum and KNZ Partners. In 2007 Adlam (hitherto non executive chairman) took an executive position on the board of Nexus PLC ( as chairman of the US operation) and effectively he runs this company in a double act with CEO Roger Richardson.

Roger Richardson – CEO, aged 47. Richardson joined Nexus in 2002. He has held senior management positions in Europe for a number of global software companies including Legent Corporation, Serena Software and Visionael. Richardson has directly managed sales forces and reseller operations in most countries around the world and brings a strong sales and marketing focus to Nexus Management.

Peter Paterson - Chairman, aged 64. Paterson joined Nexus in 1996. He began his computing career in 1965 in systems development. In 1968 he moved to Cummins Engine Company where he was involved with Arthur Anderson in the development of a fully integrated manufacturing industry system, one of the first in the United Kingdom. By 1976, he moved to London and began selling software and hardware. In 1979 he first became acquainted with recruitment agency selling, and in 1986, he started his own agency which contracted systems development staff. By 1991 he had bought another agency and he sold his business in 1996 after which he acquired a stake in Nexus. Patterson was CEO of the UK operations until 2007 when he relinquished his executive responsibilities and moved up to take Boris Adlam’s prior position as non executive chairman.

Graham Stoddart-Stones - Client Management Director, aged 58. Graham Stoddart-Stones founded Nexus Management in 1989. He is currently responsible for major client relationships and Client Services. Stoddart-Stones began his career as a computer programmer in 1968 and has accumulated over 35 years experience in the IT sector. After a career in the Royal Navy he returned to the United Kingdom in 1986 for the Channel Tunnel project prior to starting Nexus.

Peter Weller - Finance Director and Company Secretary, aged 38. Weller joined Nexus in October 2000 and became Finance Director in January 2001. He initially worked for Harvard International, now part of Alba Plc. He joined Coral Racing, part of Bass plc, in 1987, where he remained for ten years, becoming assistant financial controller to both Coral Racing and Coral Stadia. Weller was financial controller at Barkers Interiors, having qualified as a Certified Chartered Accountant in 1999.

Richard Jaques – Non Executive Director, aged 44. Jaques is currently a director of The Geta Network Ltd, Interlink Marketing Ltd, Taste and Enjoy Ltd, Mansion Housing Ltd and Your Job Ltd. In the past 5 years he has been a Director of The Partners, a subsidiary of WPP Group plc.

Jeremy Lister – Non Executive Director, aged 54. Lister has a long career in IT services and is chairman of Rivington Street Software, part of the ANS Group. Lister joined the board in November 2007.

Beneath the main board, the senior directors are:

Tara Carpenter – US Managing Director, aged 35.  Carpenter joined Nexus Management in 1998.  She began her career in the banking industry and joined Nexus as a member of the Administration team while Nexus expanded its US operations and established its  first call  center.  Carpenter quickly progressed in her Administrative role and  soon was promoted to head up Human Resources. In 2003, Carpenter was promoted to US Manager responsible for Finance and Administration  and  played an active role in redefining the data center service offering and the expansion of the Help Desk services to 24X7 global support.  Carpenter assumed the role of US Managing Director in Sept 2006 and is responsible for overseeing the US Operations.

Shad Mortazavi – Managing Director of Nexus UK, aged 35. Mortazavi joined Nexus in 1995 following his graduation from the University of London. He held the positions of Network Manager and IT Manager, and then progressed to UK Technical Manager. Mortazavi coordinated the APAC component of worldwide VPN deployment in Sydney, Australia in March 2000 for a major corporation. In September of that year, he moved to the United States and developed Nexus Monitoring Service and PC Life Cycle Management platform. In 2002, he became US Technical manager and helped complete the move to the Brunswick Data Center. He also helped Apple Computers in developing the largest administrative tool of its type in 2003.

Nexus Management’s total issued share capital consists of 841,510,537 shares. Those owning 3% or of the equity are:

Peter Paterson	10%
Graham Stoddart-Stones	9.9%
Pershing Keen	5.95%
Roger Richardson	5.3%
Boris Adlam	4.75%

The biggest risk to the Nexus model is also its biggest opportunity – its marketing arrangement with PD.  This has the potential to deliver a massive ramp up in sales and profits for Nexus without utilizing any cash – indeed it is cashflow positive – and without Nexus having to commit any marketing spend. The clear risks to that model are that either PD fails to find a replacement provider of credit for GE when that arrangement expires on April 1st or that a replacement is found but that in the face of an economic slowdown there is a reluctance by US consumers to purchase white goods on credit.

Were the global economy to slow then the SME’s which are the core constituency of Nexus (ex PD) would inevitably face a pressure on costs and indeed some would fail to survive altogether. Nexus now services a number of SMEs so its exposure to any one client is not that large but a slowing economy in the UK and US would inevitably put some pressure on sales and margins. Having said that the IT support services market is highly fragmented and Nexus’s strong balance sheet and trading position means that it would be in a strong position to win a market share as its weaker competitors fail.

Nexus is committed to growing its share of the UK SME market by acquisition. We regard this as a sensible move and valuations for acquirers of small firms are currently highly attractive. We believe that the Nexus management team has the experience and skill set to undertake such corporate deals however any takeover and subsequent integration process, however small, is not without risk.

In the most recent results for the year ending 30th September 2007, Nexus reported a spectacular 800% increase in revenues from £4 million for the 18 months ended September 2006 to £21 million for the reported period. PD Financial is the key driver of this growth, contributing a total of £17.9 million to the combined revenue figure. A trading profit of £794,000 was reported, more than a 117% increase from the same period in 2006 with PD bringing in £1 million. EBITDA for the period was £1.13 million compared to a loss of £0.17 million for the similar period in 2006 with PD Financial generating £1.17 million of the final figure. Basic earnings per share were 0.042p compared to a loss of 0.05p in 2006. At 30th September 2007, the Company’s net assets had increased by £600,000 to £3 million with cash balances of over £400,000.

We believe that Nexus currently has around £300,000 cash at bank from the first instalment of the payment for its disposal of PD stake with the next instalment of $2.7 million due in June of this year and another $2 million due over the 12 months to 30th June 2009. PD Financial is no longer considered as an associate company and will no longer be treated as such for the purposes of the Company’s consolidated accounts. This has the effect of reducing group turnover significantly.

The great uncertainty for Nexus is PD and the table below outlines a worst case profits scenario should PD fail to secure terms with a new credit supplier and fails to make suitable UK acquisitions. The key point is that Nexus would still be profitable and would retain a strong balance sheet. Our valuation on that basis is £8.58 million or 1.02p per share. Under such a scenario and with the quote on AIM having some value we would see Nexus itself  “in play” as an acquisition target. With the shares at 0.8875p the downside risk is, we believe, minimal.

Year to 30th September	Sales (£million)	EBITDA (£million)	Pre-Tax Profits (£million )	Earnings Per Share (p)	Price Earnings Ratio
2006A*18 months	3.9	(0.17)	(0.0445)	-	NA
2007A	21.0	1.1	0.794	0.042	21.13
2008E	11.5	1.8	1.0	0.083	10.69
2009E	5.0	0.8	0.50	0.040	22.18

Our conversations with Nexus lead us to believe that a replacement provider of credit for customers of PD will be secured within the next few weeks. PD’s performance between November 2007 and April 2008 is likely to have been muted but PD should still have generated sales and cash for Nexus. The signing of a replacement credit provider would allow PD to rapidly regain the positive sales momentum from Autumn 2007. However the full impact of a rejuvenated PD on the Nexus bottom line will not be seen until the 2009 financial year.

Our forecasts do not factor in any acquisitions being made by Nexus but we are of the view that this is unlikely and that, at worst, it will executive one or two small bolt on in the SME space in the UK. Nexus has net cash of £300,000 but is set to receive £1.3 million from the sales of shares in PD in June and a further £1 million a year later. Exit valuations in the IT services industry remain depressed and that means that a company with net cash is in a strong position to buy on lowly multiples.

We value Nexus on a sum of parts basis. We assume that Nexus’s 8.3% stake in PD will be sold at the same price as the February 2008 and will thus yield $1.93 million or £0.965 million. Since we expect Nexus to retain its stake until PD achieves a NASDAQ IPO, our valuation is prudently conservative. The company has cash and cash receivables of £2.6 million. Together these balance sheet items are worth £3.565 million or 0.42p per Nexus share.

However the real value of Nexus lies in its ongoing earnings stream and given the growth predicted we value that earnings stream on a multiple of 15 times forecast earnings of 0.167p for the year to September 30th 2009. On that basis we arrive at a sum-of-the-parts valuation for the group of  2.925p per share. Hence our target price for Nexus is 2.925p. The market has been so un-nerved by the recent events at PD that the shares at 0.8875p now trade at a discount to our worst case scenario valuation of 1.02p and at less than twice net cash and cash equivalents. On that basis we would argue that the downside risk is now more than discounted while the upside potential is not. Our stance is strong buy.

Year to 30th September	Sales (£million)	EBITDA (£million)	Pre-Tax Profits (£million )	Earnings Per Share (p)	Price Earnings Ratio
2006A*18 months	3.9	0.17	(0.0445)	-	NA
2007A	21	1.1	0.794	0.042	21.13
2008E	13.25	2.2	1.5	0.120	7.40
2009E	15	3.0	2.0	0.167	5.31

*Nexus is a corporate client of Bishopsgate Communications which is owned by RSH, the ultimate owner of GE&CR. The t1ps SF Smaller Companies Growth Fund which is managed by another RSH subsidiary also owns shares in Nexus.