Year-end March 2012A 2013A 2014E 2015E Key Data Revenue ( m) Rating (12 month) BUY*

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1 This research is intended for UK institutional investors only and market professionals. It is not intended for retail customers and any retail customer should seek professional, independent advice before investing. TELECOMMUNICATIONS 29 th October 2013 ADEPT TELECOM BUY* Interims: Public sector gaining momentum 149p # Year-end March 2012A 2013A 2014E 2015E Key Data Revenue ( m) Rating (12 month) BUY* Adj. EBITDA ( m) Price Target 165p (from 145p) Adj. Pre-tax Profit ( m) Risk Medium Adj. EPS (p) Ticker ADT.L DPS (p) Shares in issue 21.3m Net Cash/(Debt) ( m) Market cap 31.8m P/E (x) mth price range 52p-152p Dividend yield (%) 0.3% 1.0% 2.0% 2.3% Net debt 3.89m EV/EBITDA (x) Next event (July) SOURCE: Northland Capital Partners Limited estimates # Priced at market close, 28 th October 2013 *Northland Capital Partners Limited is the Nominated Advisor and Broker to AdEPT Telecom and therefore this information should be viewed as Marketing Material. performance was marginally ahead of forecasts (upgraded in August) with good organic profit growth and an initial contribution from the contract base acquired from Bluebell Telecom. This results in a small upgrade to 14 profit forecasts. The 1.5p interim dividend was also a pleasant surprise and we upgrade DPS to 3.0p for 14 (from 2.5p) and 3.5p in 15 (from 3.0p). We have repeatedly (and incorrectly) called the high water mark for EBITDA margins but s 20.6% looks difficult to maintain with downward pressure on both the level of higher margin Fixed Line revenue and also on Fixed Line margins. On the positive side, there are no operating costs associated with the Bluebell acquisition. saw good progress in the public sector with new contracts with six county councils through the ESPO Telecom Framework. This represents a considerable opportunity. Since period end, it has been awarded its third public sector telecom framework and AdEPT can now sell into central government bodies as well as local government and universities. We maintain our BUY rating and set a 165p price target (from 145p). Gross margin on Fixed Line Services increased 470bps to 40.3% and group gross profits increased 96k to 3.15m (37.9% up 350bps). This was the result of management of wholesale supply contracts and the impact of regulatory price changes. Administrative expenses fell marginally and hence the additional gross profit flowed through to adj. EBITDA +6.0% to 2.1m, equivalent to a 20.6% margin. The acquisition of the c. 3,000 business customers from Bluebell Telecom for an initial consideration of ( 1.9m) plus the deferred consideration on the Expanse (UK) Communications assets ( 0.3m) and the final dividend payment ( 0.2m) offset free cash flow of 1.7m and resulted in net debt nudging up 0.6m to 3.9m from 3.3m at 31 March AdEPT has renewed and expanded its banking facilities post period end and there is scope for further earnings enhancing acquisitions in a fragmented market as well as a progressive dividend policy. We maintain our BUY rating and set a new 165p price target. COMPANY DESCRIPTION AdEPT Telecom is a communications integrator (fixed, mobile and data connectivity) to the SME market and public sector. It operates a highly efficient service platform and AdEPT has some of the highest operating margins in the sector. It has built a particular strength in multi-site and 21 st Century Network-based call handling systems and offers a VoIP business offering based around BT Wholesale. CONTACTS ANALYST David Johnson +44 (0) djohnson@northlandcp.co.uk GENERAL T: +44 (0) F: +44 (0) STX: E: info@northlandcp.co.uk Website: Northland Capital Partners Limited is a member of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered Office: 60 Gresham Street, London, EC2V 7BB. Registered in England No

2 INVESTMENT APPRAISAL Over the past several years, the AdEPT investment case has been dominated by the debt that was built up through the company s initial acquisition programme. Having achieved high levels of cash conversion, AdEPT paid down more than 9m in net debt from the June 2008 peak. In the first half, management returned to meaningful acquisitions with the purchase of 3,000 business customer contracts acquired from Bluebell Telecom in August. As importantly, the organic growth story is improving with momentum building in the Public Sector with six contracts secured in. A small outperformance leads to upgrades for the and we maintain our BUY rating and increase our price target to 165p. Through high levels of process automation, AdEPT has sector leading revenue per employee and operating margin statistics and is able to take on additional contract bases without significantly expanding the operating cost infrastructure. The enlarged customer base provides scope to sell additional services to increase revenue per customer and customer stickiness. The percentage of customers taking three or more products increased to 45% ( 13: 42%). The AdEPT management team has a proven ability to make and integrate acquisitions (18 to date) and convert profits into cash. The UK business telecoms market remains highly fragmented and there is scope for further consolidation. The 3,000 contracts acquired from Bluebell in August 2013 have already been successful migrated onto AdEPT s billing systems and have added annualised revenue of 1.8m and EBITDA of 0.6m. As well as growth through acquisition, AdEPT is gaining momentum in the public sector. Initially, AdEPT was approved under the Joint Academic Network (JANET) Framework Agreement to sell data connectivity and multi-site data networks to UK Colleges and Universities. Earlier this year, it became the sole recommended supplier to Local Government and Registered Charities for calls, lines, broadband, superfast broadband (fibre) and SIP under the ESPO (Eastern Shires Procurement Organisation) Telecom Framework Contract 7. In October 2013, it has been awarded a telephony services framework by Government Procurement Service (GPS), the purchasing arm of the Cabinet Office, and AdEPT can now sell into all areas of the UK public sector. AdEPT secured contracts with six county councils in, although they only made a small contribution to revenue. Becoming the recommended supplier under the ESPO Telecom Framework does not guarantee business and even where a contract has been signed, the ramp up in revenue can be slow but the Public Sector represents a substantial opportunity as councils and other bodies look to reduce costs and improve efficiency. BUY rating and 165p price target Sector leading revenue per employee and margin statistics Proven ability to acquire and convert profits into cash Expanded Public Sector offering Six contracts in, significant opportunity For example, Pembrokeshire County Council has reported savings of more than 100,000 per annum (or 36%) on its landline telephony charges with no hardware changes/capex by switching from BT. AdEPT managed the migration of more than 1,000 analogue PSTN lines and digital ISDN channels with more than 2,000 DDI telephone numbers and 60 broadband connections within a month. 2

3 Net debt ( m) ADEPT TELECOM PERFORMANCE PBT increased 19.6% to 1.03m on revenue down 7% to 10.2m. The fall in revenue reflected further pressure in fixed line call volumes and retail price pressure following the regulatory price changes on mobile interconnect rates. Cloud-based contact centre systems and non-geographic revenue increased 33.3% to 0.8m and data connectivity was up 6% to 1.4m. Further profit progression Gross margin on Fixed Line Services increased 470bps to 40.3% and group gross profits increased 96k to 3.15m (up 350bps to 37.9%). This was the result of management of wholesale supply contracts and the impact of regulatory price changes on mobile interconnect and ISDN30 circuit rates. Administrative expenses reduced marginally and hence the additional gross profit flowed through to adj. EBITDA +6.0% to 2.1m, equivalent to a 20.6% margin ( 13: 18.0%; 13: 17.8%). Finance costs were also 45% lower at 0.1m, reflecting the lower debt position. As a result, PBT increased 20% to 1.0m; PAT by 30% to 0.7m and adj. EPS by 14% to 7.5p. Management has declared an interim dividend of 1.5p (up 100%) that will absorb c. 0.3m of funds. It is expected to be paid in April. A final dividend is expected to be proposed with the March full year results. The initial Bluebell acquisition consideration ( 1.9m) plus the deferred consideration on the purchase of Expanse (UK) Communications assets ( 0.3m) and the final dividend payment ( 0.2m) offset free cash flow of 1.7m and resulted in net debt nudging up 0.6m to 3.9m from 3.3m at 31 March We would anticipate a year end net debt position of 3.3m. Acquisition pushed up net debt position SUSTAINED REDUCTION IN NET DEBT 0 08A 09A 10A 10A 11A 11A 12A 12A 13A 13A 14A 14E 15E Bluebell Telecom contract base acquisition. -12 SOURCE: Company & Northland Capital Partners Limited estimates AdEPT benefits from a very low capex model ( 21k in ). This, coupled with strong working capital management (around two thirds of customers are on direct debit), results in a high conversion of EBITDA into cash. The strong cash generation has enabled management to pay down more than 9m of the debt that was amassed during the initial buy-and-build phase. 3

4 Adj. EBITDA margin ADEPT TELECOM Post period end, AdEPT renewed and extended its bank facilities through to October 2016 comprising a 5m Revolving Credit Facility (RCF) and a 1.5m overdraft. There is an existing 2.5m term loan still in place. This provides additional headroom for selective acquisitions. Renewed and extended banking facilities FORECASTS AND VALUATION revenue was in line but the gross (37.9%) and EBITDA (20.6%) margins were better than expected and flow through to a small upgrade for 14 profit forecasts (+ 0.1m). We have repeatedly (and mistakenly) called the high water mark on margins but believe the levels achieved in will be difficult to sustain. First, we anticipate a further deterioration in higher margin Fixed Line Services (partially offset by the contribution from the Bluebell contract base) and second some margin pressure as regulatory price changes on mobile interconnect rates flow through. On the operating cost base, we anticipate some expansion of the direct sales force as AdEPT looks to take advantage of the Public Sector opportunity. As a result, we expect adj. EBITDA margins to settle around 19% for the full year. Expect EBITDA margins to settle around 19% ADJUSTED EBITDA MARGIN PROGRESSION 20.0% 19.0% 18.0% 17.0% 16.0% 15.0% 14.0% 13.0% 2010A 2011A 2012A 2013A 2014E 2015E SOURCE: Company & Northland Capital Partners Limited estimates AdEPT s share price has enjoyed a strong performance over the past two years (+350%) but this has merely brought the company s rating in line with its peer group as investors became comfortable with the debt and its reduction. As management has converted profits into cash, the EV/EBITDA multiple has gradually increased but equity has come to represent a larger proportion of the enterprise value. On the basis of our increased price target, AdEPT would be trading on an 14 EV/EBITDA of 9.5x and 8.7x 15, in line with the current ratings of a peer group that comprises Alternative Networks (AN..L), Daisy (DAY.L) and Maintel (MAI.L)., 4

5 SUMMARY FORECASTS Year-end March 2010A 2011A 2012A 2013A 2014E 2015E Profit & Loss ( m) Revenue Gross profit Gross margin (%) 37.2% 29.8% 32.2% 34.5% 34.9% 34.4% Operating costs (8.4) (5.4) (5.3) (5.3) (5.3) (5.3) Northland operating profit (loss) Adjustments (2.4) (2.0) (1.9) (1.7) (1.9) (1.9) Reported operating profit (loss) Depreciation & Amortisation (1.9) (1.5) (1.7) (1.8) (1.9) (1.9) Northland EBITDA Adj. EBITDA margin (%) 14.0% 15.3% 16.7% 17.8% 19.0% 19.0% Net finance income (1.3) (0.9) (0.6) (0.4) (0.4) (0.3) Northland PBT Reported PBT (0.1) Taxation (0.2) (0.5) (0.6) (0.7) (0.7) (0.7) Northland PAT Reported PAT (0.4) Earnings per share Average shares in issue Northland EPS (p) Reported EPS (p) (1.69) Dividend per share (p) SOURCE: Northland Capital Partners Limited estimates. Year-end March 2010A 2011A 2012A 2013A 2014E 2015E Cashflow ( m) Reported PBT (1.4) (0.1) Adjustments for: Depreciation and Amortisation charge Impairment charge Net finance costs Operating cash flow pre working capital (Increase)/Decrease in debtors/receivables (0.1) 0.0 (0.2) 0.7 (0.5) 0.2 Increase/(Decrease) in creditors/payables (0.5) (0.2) (0.6) (0.8) (0.0) 0.2 Movements in working capital (0.6) (0.1) (0.8) (0.1) (0.5) 0.4 Cash generated by operations Corporation tax received/(paid) 0.1 (0.1) (0.2) (0.3) (0.7) (0.8) Net cash generated from operations Net interest (0.9) (1.1) (0.5) (0.3) (0.4) (0.3) Purchase of intangible fixed assets (0.1) (0.0) (0.1) (0.1) (0.1) (0.1) Acquisition of trade and assets (0.6) (2.0) (0.5) Net cash used in investing (1.0) (1.1) (0.6) (1.1) (2.5) (0.9) Net cash from financing (1.6) (1.6) (1.5) (2.5) (1.8) (1.5) Net increase in cash and cash equivalent cont. ops (0.2) (1.4) 1.3 Cash at beginning of year Cash at year end Net cash/(debt) SOURCE: Northland Capital Partners Limited estimates. 5

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7 DISCLOSURES ISSUER APPLICABLE DISCLOSURES AdEPT Telecom ADT.L 1,5,7,8 1. Northland Capital Partners Limited ( Northland ) acts as Nominated Advisor and/or broker to the company. 2. Northland and/or its affiliates companies do beneficially own 1% or more of any class of the issuer s equity securities, as of the end of the month immediately preceding the date of issuance of the research report or the end of the second most recent month if the issue date is less than 10 calendar days after the end of the most recent month. 3. The authoring analyst or any associate of the authoring analyst does maintain a long or short position in any of the issuer s securities directly or through derivatives, including options or futures positions. 4. Northland, its affiliated companies, partners, officers, directors or any authoring analyst of Northland has provided services to the issuer for remuneration during the preceding 12 months other than investment advisory or trading services. 5. Northland or any of its affiliated companies has performed investment banking services for the issuer during the 12 months preceding the date of issuance of the report. 6. A partner, director, officer, employee or agent of Northland or any of its affiliated companies is an officer, director, employee or advisor of the issuer. Disclosures are applicable for all companies 7. The authoring analyst, or any associate of the authoring analyst, has viewed the material operations of the issuer. 8. The authoring analyst, or any associate of the authoring analyst, received reimbursement for travel expenses. 9. Northland makes a market in the securities of this company. DISCLAIMER This document is provided solely to enable clients to make their own investment decisions. It may therefore not be suitable for all recipients and does not constitute a personal recommendation to invest. It does not constitute an offer or solicitation to buy or sell securities or instruments of any kind. If you have any doubts about the suitability of this service, you should seek advice from your investment adviser. This document is produced in accordance with UK laws and regulations. It is not intended for any person whose nationality or residential circumstances may render its receipt unlawful. The past is not necessarily a guide to future performance. The value of shares and the income arising from them can fall as well as rise and investors may get back less than they originally invested. The information contained in this document has been obtained from sources which Northland Capital Partners Limited believes to be reliable. The Company does not warrant that such information is accurate or complete. All estimates and prospective figures quoted in this report are forecasts and not guaranteed. Opinions included in this report reflect the Company s judgement at the date of publication and are subject to change without notice. If the investment(s) mentioned in this report are denominated in a currency different from the currency of the country in which the recipient is a resident, the recipient should be aware that fluctuations in exchange rates may have an adverse effect on the value of the investment(s). The listing requirements for securities listed on AIM or PLUS markets are less demanding, also trading in them may be less liquid than main markets. Northland Capital Partners Limited and/or its officers, associated entities or clients may have a position, or other material interest, in any securities mentioned in this report. Northland Capital Partners Limited does not provide recommendations on securities of firms with which it has a corporate relationship. More information about our management of Conflicts of Interest, Investment Research Methodology & Definition of Recommendations can be found at Northland Capital Partners Limited is authorised and regulated by the Financial Conduct Authority and a Member of the London Stock Exchange. Published by/copyright: Northland Capital Partners Limited, All rights reserved 7

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