Gattaca plc. The tide is turning. Robust macro tailwinds to drive future demand. 8.2% yield on offer while recovery takes shape. Paul Hill (Analyst)

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1 plc The tide is turning 20 April 2017 Any investor worth their salt knows it is impossible to precisely call a bottom in a particular stock. For, though, we believe this moment has now passed given the compelling valuation (6.9x EV/EBIT vs 9.8x sector average), attractive 9.8% unlevered cashflow yield and constructive secular trends supporting its specialist markets. Sure, Net Fee Income (NFI) like-for-likes (LFL) have fallen of late, yet equally there are now early indications that organic growth may soon turn positive. Company Data EPIC AIM:GATC Price (last close) 280p 52 week Hi/Lo 465p/262p Market cap 87m ED valuation per share 425p Indeed, despite Friday s weaker-than-expected trading update, where our FY17 adjusted PBT and EPS estimates were trimmed 15% to 16.7m ( 7.4m H1) and 35.0p (16.1p) respectively, the Board this morning reiterated its view that business/candidate confidence is tentatively recovering after June s shock BREXIT vote backed up by sequential improvements in LFL NFI (constant currency) with Q3 currently tracking at -2% (vs -3% Q2 and -5% Q1) and Q4 predicted to be slightly up again Share Price, p Robust macro tailwinds to drive future demand Likewise, the wider UK jobs market also appears getting its mojo back, as evidenced by, and, all posting better numbers last week. Admittedly there might be a minor dip in hiring over the next 2 months as a consequence of the forthcoming General Election. Yet, further out this could actually galvanise the country, especially if the Conservatives (as Pollsters envisage) win a thumping majority - which is probably why the Pound jumped almost 2% (vs $) after Tuesday s announcement. Structurally too, we believe is ideally placed to benefit from rising global spend on infrastructure (Heathrow, Hinkley Point, Crossrail 2, HS2, rail electrification, smart cities), engineering and technology (eg Cyber security, IoT, Cloud, 5G, autonomous vehicles), augmented by X-selling synergies, expansion abroad and the ongoing adoption of IT/Telecoms within its other key verticals of Automotive, Aerospace, Defense, Energy and Maritime. Sure, there will be bumps along the way for instance the soft patch in Telecoms NFI (ED estimate -5% LFL), where activity levels have temporarily stalled at a couple of major customers. In response, resource has been reallocated to the sweet-spots of network infrastructure, connected world, operating/billing systems and R&D a refocusing strategy that is already showing encouraging incremental progress within IT. 8.2% yield on offer while recovery takes shape CEO Brian Wilkinson adding Performance in H1 reflects the tougher UK trading conditions post EU Referendum. The softening in NFI in H1 was driven by near term uncertainty which led to elongated hiring decisions and some projects being delayed. However the medium-term outlook in our sectors remains positive, [and the] continuing shortage of Engineering and Technology skills will lead to increased demand from our clients as their projects move through the delivery cycle Source: Digital Look Description is the UK's #1 specialist engineering (60% group NFI) and #5 technology recruitment agency, providing contract, temporary and permanent staff. It derives 32% of NFI overseas (albeit mostly still invoiced from UK), and 74% from placing contractors (circa 9,000 on assignment), with 26% coming from permanents. The global engineering and technology recruitment markets are valued at circa $26bn and $57bn respectively (Source: Recruitment International Top 500 Report 2016) offering substantial long term potential. Paul Hill (Analyst) paul.hill@equitydevelopment.co.uk Hannah Crowe hannah@equitydevelopment.co.uk Please refer to the important disclosures shown on the back page and note that this information is Non-independent and categorised as Marketing Material

2 plc 20 April 2017 With regards to the balance sheet, net debt closed January 2017 at 27.9m (vs 25.0m July) after absorbing 5.3m in dividend and 2.9m of tax payments. Looking ahead, net borrowings are set to climb to 32.4m by the July y/e, following February s acquisition of a 70% stake in RSL for 6.9m, partly offset by continued good cash conversion (ED est 84% H1). Scope to further optimise tax efficiency Elsewhere, the H1 statutory effective tax rate (ETR) rose to 35.5% from 31.5% LY, reflecting 0.7m of with-holding tax (WHT) relating to overseas (32% of NFI) operations, which is compensated for by higher associated gross margins. That said, we hope the ETR will ultimately migrate lower, as standard tax planning measures kick in and UK corporation tax declines from 20% to 17% by April In fact, prior to its 2015 acquisition, Networkers reported a 35.8% ETR (see below), even though it possessed a much greater exposure (ie proportionally) to emerging markets. (Note: H1 underlying ETR was 30.7%, after adjusting to purchased goodwill amortisation, exceptionals, etc) Latest reported tax rates 2014 Networkers pre-acqn 35.8% 28.9% 30.5% 27.9% 32.0% 31.3% 35.5% 27.0% 26.0% 20.0% 30.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% Source: Equity Development Ok, but is the 23p/share dividend safe? Of course nothing is 100% cast-iron, but for, we believe there is minimal risk of a dividend cut, based on the solid economic backdrop, 1.5x EPS cover, comfortable 1.7x net debt/ebitda levels, significant un-utilised banking facilities ( 75m invoice discounting & 30m RCF) and recent completion of the Networkers restructuring. Here 3.1m of annualised cost savings have been realised, of which 1.8m is being re-invested to accelerate growth. Moreover, excluding one-offs the business as a whole is set to generate circa 11m of underlying cashflow (post capex, tax & interest) this year regardless of what appears to be trough earnings - which should be more than sufficient to meet the anticipated 7.1m dividend. In fact the Board seem to agree, and have maintained the 6p interim pay-out. 2

3 20 April 2017 plc It shouldn t take much to propel UK recruitment back into expansionary mode Likewise, the latest data from the Office for National Statistics (see below) indicates a more benign outlook for the industry, with February s unemployment figures (1.56m) coming in at their lowest levels since 1975 (4.7% vs 5.1% LY) - whilst hours worked per person (32.4/week) and job vacancies (767k) both hit 15 year highs. February s UK unemployment rate declined to 4.7% Source: Office of National Statistics Nonetheless, in the unlikely event of an unforeseen economic slump, then we would hope the Board in the short term (at least) would not be held hostage to the dividend, but rather prioritise organic growth, given the firm s 15%+ ROCE is above most smallcap investor s cost of capital. Plus if the shares were ever to drop further, then we suspect the group would come under the micro-scope of several potential interested parties, particularly overseas players who may wish to take advantage of the s devaluation vs the $/. A fate that incidentally happened to international staffer and careers adviser, Penna Consulting, in March 2016, when it was purchased by for 105.3m equivalent to takeover multiples of 15.5x trailing EV/EBITDA and 16-17x forward EBIT. At some point too, deputy chairman, founder George Materna (64), might wish to crystallise his 25.3% holding. What else came out of today s H1 17 results? In terms of the H1 numbers, underlying EBIT fell 21% to 8.0m, due to the decline in NFI (- 4% LFL constant currency to 35.4m), impact on operational gearing and mixed conditions across most Engineering (-4% to 21.1m) disciplines (excluding Technology/Aerospace), where delays were experienced at Network Rail and Highways England. On top the recent IR35 legislative changes imposed by HMRC, affected demand in the public sector albeit this should settle down over the next 2 months. Technology NFI slipped -5% to 14.3m thanks to slowdowns at Huawei and Ericsson, and a - 5% fall in IT (51% of divisional NFI), albeit the latter was much improved on the -14% and - 21% experienced in the preceding two periods. 3

4 plc 20 April 2017 In relation to headcount, 24 new fee earners were appointed, which together with higher than anticipated restructuring spend ( 1.1m) on Networkers, deferred back-office savings as finance functions are centralised, and extra costs ( 300k charged above the line) in supporting a pan-european client win - meant that underlying H1 EBIT conversion (of NFI) narrowed to 22.6% from 28.1% LY. Similarly, overall contract NFI nudged -3% lower to 26.3m (2016 H1: 26.6m) with gross margins shrinking 0.3% to 8.9% (2016 H1: 9.2%), whilst Permanent recruitment fees dropped -7% to 9.1m (2016 H1: 9.9m). Maintaining our 425p/share valuation Lastly, we understand that integration of RSL s back office is scheduled for H1 18, once the final bits & pieces on the Networkers restructuring have been completed with the earn-out for the remaining 30% stake likely to be exercised via a call/put option in months time based on 5.0x trailing EBITA (subject to a max. total consideration of 15m). So, putting all this together from an investment perspective, we think the stock at 280p represents good value, trading on FY17 EV/EBITA and PER multiples of 6.9x and 8.0x, whilst paying a sector leading 8.2% dividend yield. Current Year EV/EBIT ratios sector Source: Equity Development. Prices as per 19 th April

5 20 April 2017 plc Current Year P/E ratios sector Source: Equity Development. Prices as per 19th April 2017 Current year dividend yields sector 3.9% 2.6% 1.9% 5.8% 8.2% 4.4% 3.8% 3.7% 2.1% 2.3% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% Source: Equity Development. Prices as per 19th April

6 plc 20 April 2017 Summary financials / ratios (continuing operations) 2014 Act 2015 Act 2016 Act 2017 Est 2018 Est (July yearend) '000s '000s '000s '000s '000s Turnover (continuing activities) 451, , , , ,880 % growth 10.4% 9.8% 24.4% 3.4% 6.8% Gross margin / NFI 44,982 52,458 72,387 75,775 81,765 NFI growth rate 17.2% 16.6% 38.0% 4.7% 7.9% Adjusted EBIT 13,621 17,347 21,497 17,814 21,263 Net interest -1,015-1,074-1,025-1,100-1,050 Adjusted PBT 12,606 16,273 20,472 16,714 20,213 Adjusted diluted EPS (p) Adjusted EPS growth rate 17.5% 18.2% 1.0% -21.0% 19.2% Dividend (p) Valuation benchmarks Adj NFI / EBITA conversion 30.3% 33.1% 29.7% 23.5% 26.0% P/E ratio (diluted) EV/NFI EV/EBITA (diluted) PEG ratio NFI margin 10.0% 10.6% 11.7% 11.9% 12.0% Dividend yield 7.1% 7.9% 8.2% 8.2% 8.2% Dividend cover Adjusted corporate tax rate -23.3% -14.5% -30.7% -31.0% -31.0% Adj ROACE 30.6% 21.5% 19.6% 15.4% 17.6% Unlevered/adj. free cashflow yield (FCF/EV) 10.4% 10.8% 11.7% 9.8% 11.6% Net cash/(debt) -3,109-33,644-25,013-32,367-30,046 Net debt : EBITDA Diluted sharecount (Adj for 2015) 26,073 31,730 32,040 32,353 32,353 Shareprice (p) 280 Source: Company historic data, Equity Development estimates Key risks Economic downturn affecting engineering and technology recruitment Greater competition Introduction of the IR35 Intermediaries Legislation from April 2017 in the UK, which is set to reform off-payroll working in the Public Sector. Although this is unlikely to materially impact GATC given its relatively small UK government-focused contractor base it could nonetheless become more significant if the scope was ever widened to ultimately include private companies Overseas expansion along with foreign exchange fluctuations Acquisition integration, albeit management have a good batting average Consolidation of customer base (eg possible takeover of Atkins by SNC-Lavalin) Political interference which could impact UK infrastructure spend 6

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