Twice in the space of a week Nexus Management has served up encouraging news for its shareholders and although the shares have yet to respond to this improvement in its fortunes the platform for growth has been established firmly and, at 0.875p, we reiterate our stance of strong buy with a 2.925p target price.

On June 3rd, after months of waiting, the AIM listed provider of specialist IT Managed Services announced that its US associate PD Financial had secured a 10 year facility with a leading US issuer of private label credit cards with an initial line of $300 million. The size of the facility may well be increased in the medium term. This new credit line is three times the size of its previous one with GE Capital which was terminated on March 31st. PD. Nexus has in the past derived huge value from its relationship with PD both as an investor but also more critically via a marketing agreement where PD sold on Nexus’s support desk solutions. Nexus is confident that with a new credit line in place, PD can rapidly re-establish its pattern of aggressive sales growth which will have a material impact on its own profitability, and cash generation.
 It also underpins the value of the 8% stake in PD which Nexus holds.

Today, Nexus has announced its results for the six months ending 31st March 2008 reporting a 24% increase in core revenue from £1.5 million to £1.9 million. Gross profit has increased by 50% to £979,000 and the operating profit was £56,000 compared with a loss of £576,000 in the first half of the previous financial year. Net assets also increased from £3.4 million to £5.2 million and reported earnings per were 0.113p. These numbers above exclude the £900,000 profit booked on the sale of a 16.3% stake in PD which took place on 1st February and which must be viewed as an exceptional item.

Nexus has already received £300,000 from the PD sale and is expecting the second instalment of $2.7 million in June. With a healthy cash balance and with PD now likely to generate the new sales pipeline which will ensure strong operational cashflows, Nexus is in a good position to consider small acquisitions and we understand that it is looking at a number of targets. In terms of the non PD business, Nexus reports that there is a strong pipeline of interest for its services from a range of small multinationals or multi office organisations where their staff travel extensively and have complex IT needs.

In our recent detailed note on Nexus, we presented two possible scenarios for the company: a worst case and best case scenario. The announcement of the replacement credit provider gears the company towards the better case. Given that the full impact of a rejuvenated PD on the Nexus bottom line will not be seen until the 2009 financial year, we valued Nexus on the basis of its forecast 2009 earnings, its remaining stake in PD and its cash position to derive a target price of 2.925p. That valuation can be viewed as conservative since it values the PD stake at the same level as the recent transaction whereas if, as seems likely, it seeks a listing on NASDAQ, the IPO valuation would be materially higher. At 0.875p our stance remains strong buy.

Forecast Table Year to 30th September Sales (£million) Pre-Tax Profits (£million ) EBITDA Earnings Per Share (p) Price Earnings Ratio 2006A*18 months 3.9 (0.0445)         - NA 2007A 21 0.794 1.1 0.07 12.5 2008E 13.25 1.5 2.2 0.120 7.29 2009E 15 2.0 3.0 0.167 5.24 *Nexus is a corporate client of Bishopsgate Communications which is owned by RSH, the owner of GE&CR and the t1ps SF Growth fund which is managed by TIM, which is also owned by RSH, owns shares in Nexus.