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Nexus Management – Initiate Coverage following Good Interim Results; Buy with Target Price of 0.48p

We are initiating coverage of Nexus Management plc following the release of interim results for the six months ended 31st March 2011 on 16th May 2011 with a recommendation of buy and target price of 0.48p.

Over the past two years, Nexus Management has undergone considerable rationalisation and a key management objective for this financial year was to get each of the group’s subsidiaries trading profitably at an EBIT level. Since the group commenced its rationalisation and refocusing, it has completely written off its investments in PD Financial and sold back to management the global franchise business, Nerd Force, although retaining the UK head franchise as well the global service and support agreements. The group’s core activities are its well-established and growing UK/North American data centre managed services and the potentially faster growing but lumpy (in terms of sales revenues and timing of orders) Resilience Technology Corporation, which is engaged in delivering mission critical and ultra-high security IT network environments for the likes of NASA.

The group’s interim results indicate that Nexus is delivering against its strategic objectives. Revenues increased 6.6% from £3.191 million to £2.994 million with good growth being reported from both core divisions. Although gross profit only rose 5.0% from the comparable period’s £1.536 million to £1.613 million with the gross profit margin slipping modestly from 51.3% to 50.5% due to Resilience’s immediate policy of attacking its growing market opportunity through the use of resellers to more quickly acquire a larger market share.

Nevertheless, Nexus has maintained tight control of its operating expenses, which were reduced by 9.0% to £1,476 million and resulted in the group reporting an overall operating profit of £0.137 million compared with a loss of £0.086 million a year earlier. Indeed, the period witnessed Resilience chip in its first operating profit since its acquisition despite the additional short-term costs incurred training the new resellers.

Finance expenses increased 31.3% from £0.112 million to £0.147 million as a result of using expensive trade finance facilities. Nevertheless, Nexus Management recorded a 94.9% year on year improvement in its pre-tax loss before exceptional items, which fell from £0.198 million to £0.010 million.

Net exceptional items showed a year on year reverse of £0.117 million from a credit of £0.20 million to a charge of £0.097 million principally due the impact of a very weak US$ and as a result the pre-tax loss after exceptional items showed a more modest improvement from £0.178 million to £0.107 million while the loss per share declined from 0.0002p to 0.0001p, a year on year improvement of 50%.

Table: Profit & Loss £000

6 months ended 31st March	2011	2010	% change
Revenue (Continuing Operations)	3,191	2,994	6.6
Cost of Sales	(1,578)	(1,458)	8.2
Gross Profit	1,613	1,536	5.0
Margin	50.5%	51.3%
Operating Expenses	(1,476)	(1,622)	(9.0)
Operating Profit	137	(86)	NA
Margin	4.3%	NA
Finance Income/(Expense)	(147)	(112)	31.3
Pre-tax Loss before Exceptional Items	(10)	(198)	(94.9)
Exceptional Items:
Amortisation of Intangible Assets	(53)	(56)	(5.4
Foreign Exchange Adjustment	(32)	103	NA
Share based Payment	(12)	(27)	(55.6)
Pre-tax Loss after Exceptional Items	(107)	(178)	(39.9)
Taxation	0	0	NA
Loss on Discontinued Operations	0	(14)	NA
Loss for Period	(107)	(192)	(44.3)
Loss per Share (basic)	(0.0001p)	(0.0002p)	50.0

Source: Company

Since the close of the first half’s trading period ended 31st March 2011, trading conditions for Nexus have remain fragile in both the UK and North America. Nevertheless, the established managed services operations continue to steadily improve while Resilience is benefiting from its growing customer base for maintenance income and further equipment orders. Additionally, Resilience’s expanding reseller base should supplement its direct sales efforts and start to drive increasing levels of new business although as in earlier accounting periods the timing and lumpiness of any new business win is difficult to predict. Consequently, we have adopted a very conservative approach and based our forecast only upon the current business’ performance but will adjust expectations to reflect the resultant level of on-going revenue as Resilience matures within the group. Nevertheless, Nexus, given its rather unfortunate history, has a lot to prove and as such we are initiating coverage on a relatively undemanding EV/Sales current year multiple of 1.0 times, which indicates a target price of 0.48p and with the shares trading at 0.305p a recommendation of Buy.

Financial Records & Forecasts

Year to 30th September	Turnover (£000) 1	Pre-tax Profit (£000) 1	Earnings Per Share (p) 1	Price Earnings Ratio (x)	Dividend (p)	Yield (%)
2009A	5,064	(535)	(0.49)	NA	0.0	0.0
2010A	5,850	(183)	(0.09)	NA	0.0	0.0
2011E	6,100	0	0.00	NA	0.0	0.0

Notes: 1 Continuing operations

Key Data
EPIC	NXS
Share Price	0.305p
Spread	0.28p – 0.33p
Total no of Shares	1.119 billion
Market Cap	£3.41 million
NMS	100,000
12 Month Range	0.2p – 0.4p
Market	AIM
Website	www.nexusmanagementplc.com
Sector	Software & Computer Services
Contact	Roger Richardson Chief Executive 0845 119 2100