Stock Focus Sfg Australia (SFW)

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HERE COMES THE BRIDE...ANALYSING A POTENTIAL SFW-WHG MERGER

RECOMMENDATION : POSITIVE EAP remains Positive on SFW, with blended valuation of 52 cps (note that this is our stand-alone valuation of SFW).

WHAT’s NEW?

SFW-WHG merger talks. SFW has confirmed “media speculation regarding a possible merger between SFG Australia Limited (SFW) and WHK Group (WHG). SFW confirms that it has held discussions with WHK in relation to a merger of equals and discussions are preliminary and incomplete and there can be no assurance that a transaction will

eventuate”. Previous talks in 2010 did not result in a deal. We estimate 28% value accretion is achievable from 5% cost-

out of the combined WHG-SFW cost base. This is conservative, given SFW extracted 11.7% cost-out from the Snowball-Shadforth merger.

Revenue synergies and PE re-rating are possible additional upsides.

WHAT’s CHANGED? No change to our forecasts.

WHAT NOW? Post any merger, we expect investors will focus on:

Synergy benefits: (i) We estimate achievable cost synergies are

at least 5% of the combined SFW-WHG cost base, creating ~31% of total shareholder value. Table 1. (ii) Revenue synergies are

another potentially material benefit, but difficult to quantify. While WHG is strong in accounting (78% revenue), SFW is weak in accounting (2% revenue) but strong in financial planning and funds management (84% revenue).

Valuation re-rating potential: (i) High growth, high margin peers trade on higher multiples than SFW and WHG eg. PTM’s EBIT/revenue margin is 76% and its PE is 16.9x; PPT’s EBIT/revenue

margin is 23.6% and its PE is 17.9x. (ii) If MERGECO gains traction in cross-sell, then margin expansion and up to ~15% valuation re-rating could follow.

Scale benefits include improved platform pricing. MERGECO’s total $31bn FUMA exceeds PTM ($16bn FUM) and PPT ($27bn FUM as at

FY12), approaching BTT ($44bn), but behind sector leader HGG ($100bn).

Acquisition potential. Comparable acquisitions PE multiples have increased from 12.1x in 2009-10 to 17.7x in 2012.

Trading Data

Last Price $0.45

12 month range $0.32 - $0.47

Market Cap $328m

Free Float $167m (51%)

Avg. Daily Volume 0.3m

Avg. Daily Value $0.1m

12 month return (historical) 23.7%

Expected return improvement driven by both

structural (cost-out) and cyclical (markets recovery) drivers.

Operating leverage to drive margin

expansion. Earnings Forecasts

Yr to June 09A 10A 11A 12A 13E 14E

EBITDA ($m) 39.2 41.9 45.6 49.3

Rep NPAT ($m) 25.9 11.6 31.9 35.0

Adj NPAT ($m) 27.4 28.9 31.9 35.0

EPS (¢) 3.9 3.9 4.3 4.7

EPS Gth (%) (0.2) 10.3 9.6

PER (x) 11.6 11.7 10.6 9.6

PEG Ratio (x) 1.2 0.6 0.6 0.7

DPS (¢) 2.5 2.0 2.6 2.8

Yield (%) 5.6 4.4 5.7 6.2

Franking (%) 100% 100% 100% 100%

ROE (%) 17% 19% 19% 19%

EV/EBITDA (x) 7.9 7.4 6.4 5.7

Net Debt/EBITDA (x) (0.5) (0.4) (0.8) (0.9)

Int. Cover (x) (89.6) (94.6) (50.3) (29.0)

Valuation (blended) $0.52

George Gabriel, CFA

ggabriel@evansandpartners.com.au

October 29, 2012

+61 3 9631 9853

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EAP VIEW

The merger makes commercial sense and could be materially value accretive (subject to deal terms, equity dilution, synergy capture etc.). Assuming 5% cost synergies results in 28% value creation. Table 2.

5% cost synergies appears very conservative, given that SFW extracted 11.7% synergies ($10.5m cost out of $90m combined cost base) from its Snowball-Shadforth merger (refer EAP Note, “Ready for Lift-Off”, Aug 12).

Revenue synergies are a potentially significant source of value creation.

In the analysis below, our key conclusions are:

(i). Shareholder value could increase by ~28% from extraction of 5% cost-out of the combined SFW-WHG cost base. This cost reduction appears achievable (and conservative even) based on SFW’s targeted ~11% cost reduction from the merged Shadforth-Snowball. Table 1.

(ii). The businesses are complementary, and present both revenue and cost synergy opportunities. Table 2.

(iii). MERGECO would present an attractive investment proposition, with a steady revenue base, FUM leverage, significant revenue cross-sell opportunities and M&A optionality.

(iv). MERGECO has reasonable prospects of up to ~15% PE multiple valuation re-rating if it can drive cross-sell (of both accounting and funds management services) as well as margin expansion (through both cost reduction and sales of higher margin and scalable funds management products).

(v). The average acquisition multiple of comparable businesses is 17.7x in 2012, which implies ~69% total upside to SFW’s current trading multiple.

1. VALUE ACCRETION ANALYSIS

We estimate that a merged SFW-WHG (“MERGECO”) could reduce its combined pro-forma cost base by 5%. Our conclusion is based on the following:

The integration of the Shadforth Financial Group (“Shadforth”) and Snowball Group is on track to extract $10.5m in FY13F cost savings. These costs savings have been generated across 3 cost categories: (i) portfolio administration supply contracts, (ii) property savings and (iii) duplicated functions.

We expect that MERGECO will extract cost savings from these same 3 categories, given (i) increased FUM is often a catalyst for improved pricing from platform providers; (ii) property savings could be material given both have a national office footprint; and (iii) there are likely to be duplicated head office functions given both groups are servicing a national footprint. Table 2.

On a combined FY13F cost base of ~$96.5m (pre-cost reductions), this implies cost synergies of ~11% across the total combined cost base is achievable in a merger of equals with comparable business

models. (Refer EAP Note, “Ready for Lift-Off”, dated 31 Aug 2012). Table 1 summarises our calculation of ~31% value accretion.

TABLE 1: VALUE ACCRETION ANALYSIS

A$M WHG SFW Calcuations MERGECO

FY13 revenue 430.0 135.0 565.0

FY13 operating costs 389.9 92.9 482.7

Assumed cost synergy 5%

Assumed synergy savings -24.1

FY13 operating costs post-synergies 458.6

Profit before tax 106.4

Tax rate 30%

Tax 31.9

NPAT 74.5

FY13 PE 11.2x 10.5x 10.5x

Mkt Cap ($m) 782

Total current market cap 281 328 609

Value accretion 28% Source: EAP. Note that value accretion is subject to final deal terms, any potential equity dilution and realisation of synergies.

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2. COMPARE AND CONTRAST

Table 2 summarises the comparison between WHG and SFW. Key conclusions are:

(i). Considerable property rationalisation scope exists, given both have national office footprints. (ii). WHG’s New Zealand office network creates a new growth option for SFW, given SFW lacks a NZ

presence. (iii). Approx. ~26% increased FUMA would provide a catalyst for renewed platform pricing discussions. (iv). Material margin expansion opportunities, given WHG’s lower margin accounting franchise has

limited wealth management penetration. SFW is much higher margin, given its funds management

manufacturing capability and scalable platforms and financial advisory services. We believe that a successful cross-sell of SFW’s funds management capabilities into WHG’s accounting client base would not only drive margin and revenue growth, but also potentially a PE valuation re-rating of MERGECO.

TABLE 2: COMPARE AND CONTRAST OF SFW AND WHG

Comparison WHG SFW

Business Model Wealth management focus Relatively weak revenue

contribution (~13% financial

planning revenue)

Strong financial planning/funds

management focus (86% revenue).

Mosaic brand white labels funds

managed by Dimensional; utilises

platforms of BT, Symetry and Colonial

Accounting and other

revenues

Strong accounting revenues

(~78% total FY12 revenue),

residual revenues from risk

and finance broking (~9%).

Limited accounting focus (~2% FY12

revenue). Some stockbroking (~2% total

revenue), insurance and mortgage

broking (~12%).

FUA $6.3bn FUA $24.5bn FUMA

Profitability

Revenue (A$M) $413m $118m

EBIT (A$M) $40m $42m

EBIT/revenue margin 9% 27%

FY13F cost/income ratio 90% 70%

National reach

Office footprint19 offices across 5 Australia

States; 6 in New Zealand

14 offices in 6 States

Staff numbers 179 salaried advisers 120 salaried advisers

Valuation

FY13F PE multiple 11.2x 10.5x

FY13F EV/EBIT multiple 7.8x 7.0x

Source: EAP, company reports

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3. WHAT WOULD MERGECO LOOK LIKE?

We believe MERGECO would present an attractive investment proposition, given its steady revenue base (accounting fees), with FUM leverage (both cyclical recovery and long-term structural growth), revenue cross-sell and margin expansion opportunities (selling accounting services into SFW’s client

base and funds management services into WHG’s client base) and M&A optionality (both as a target and acquirer). Key characteristics of MERGECO would be:

Defensive earnings base with FUM growth leverage.

o WHG’s $322m accounting revenue would provide relatively defensive earnings, comprising

~61% of MERGECO’s pro-forma revenue of $531m, and base. We would expect this defensive earnings base to grow at GDP each year (the average of Australian Business Services revenue growth from FY10-FY12 is 2.7% p.a.).

o SFW provides market leverage, with every 1% increase in the Australian equity index translating to 0.5% NPAT increase (refer EAP report, “Ready for Lift-Off”, dated 31 August 2012). At this stage, it is

not clear what MERGECO’s market leverage multiple would be. Margin outlook.

o MERGECO has a medium-term margin expansion opportunity as it reduces costs (property and staff duplication; platform cost reduction) and cross-sold products into the respective client bases.

Significant scale. o MERGECO would be the 6th largest listed diversified financial within its peer group. Chart 1. o MERGECO’s FUMA would be ~$31bn. This would exceed PPT ($27bn as at FY12) and be

approaching BTT’s $44bn, but be well behind market leader HGG’s $100bn FUM. Increased operational risk. The key unknowns are: (i) who would manage the combined entity; and (ii) the

degree of operational complexity in combining (presumably differing to various degrees) different IT systems, remuneration models and cultures.

Equity dilution is possible. o Prior to the announcement of merger talks, SFW traded on 11.3x FY13F PE, WHG on 10.7x FY13F PE.

However, WHG has re-rated to 11.2x FY13F PE whilst SFW has de-rated to 10.5x.

o We believe this is because WHG’s public commentary indicates that it was approached by SFW and that WHG has engaged advisors to assist, suggesting SFW may be compelled to offer a valuation premium to WHG shareholders, despite SFW’s pursuit of a “merger of equals between the parties”.

MERGECO could trade on higher PE multiples if cross-sell gains traction. o Higher margin financial services businesses trade on much higher multiples – eg. PTM’s EBIT/revenue

margin is 76% and its PE is 16.9x. Likewise, PPT’s EBIT/revenue margin is 23.6% and its PE is 17.9x.

o If MERGECO’s cross-sell of SFW’s higher margin funds management products into WHG’s lower margin accounting client base gains traction, a valuation re-rating is likely to ensue.

CHART 1: MERGECO RELATIVE SCALE

23 47 101

103

130

156

210

281

328 5

86

609

632

1,1

34

1,2

86

1,3

81

1,9

98

0

500

1,000

1,500

2,000

2,500

WIG

PLB

TR

G

BFG

EQ

T

TR

U

MO

C

WH

G

SFW

MFG

ME

RG

EC

O

BT

T

PP

T

HG

G

IFL

PT

M

$m

Source: EAP, IRESS

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4. WILL MERGECO’s VALUATION MULTIPLE RE-RATE?

We analyse comparable company trading multiples and conclude that (i) size per se is not the determinant of PE valuation multiples; (ii) instead, higher margin and higher growth outlooks are the key drivers of valuation multiples. Accordingly, we believe that MERGECO has reasonable prospects of

up to ~15% PE multiple valuation re-rating if it can drive cross-sell (of both accounting and funds management services) as well as margin expansion (through both cost reduction and sales of higher margin and scalable funds management products).

Both WHG’s PE of 11.2x and SFW’s 10.5x are lower PE multiples than sector peers. Table 3. Excluding the

sector’s highest rated players by PE multiple (MFG, PPT, PTM), the sector average FY13F PE is 12.0x. Therefore, the key analytical question is - will MERGECO trade on a higher PE? There is NOT clear evidence that larger financial services businesses trade on higher multiples. eg,

AMP is the largest in the peer group (mkt cap $13.7bn, FY13 revenue of $13.9bn) but its PE is only 13.6x. However, higher margin businesses trade on higher valuation multiples – eg. PTM’s 78% EBIT/revenue

margin with 16.6x FY13F PE and PPT’s 17.8x multiple with 26% EBIT/revenue margin. Also, the higher growth businesses trade on much higher multiples – MFG trades on 50.1x FY13F PE

given its very high FUM flows.

TABLE 3: COMPARABLE COMPANIES TRADING MULTIPLES

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5. ACQUISITION POTENTIAL

Comparable acquisition multiple analysis provides a useful cross-check against our MERGECO upside analysis. Our analysis above concludes that MERGECO could achieve ~43% share price upside given:

(i). ~28% value accretion from cost synergies. (ii). ~15% PE re-rating if the market recognises MERGECO’s outlook for higher margins.

We have not attempted to quantify any valuation upside from revenue synergies, however comparable companies acquisitions trading multiples provide a useful benchmark of the potential upside. We note

that the average acquisition multiple of comparable businesses has steadily increased since April 2009 (the bottom of the GFC) to ~17.7x in 2012, which implies ~69% total upside to SFW’s current trading multiple.

TABLE 4: COMPARABLE ACQUISITIONS TRADING MULTIPLES

Target Acquirer FUMA $mTrailing

PER (x)

Apr-09 Australian Wealth Management Ltd IOOF Holdings Ltd 67,600 8.4

Sep-09 Aviva Australia Holdings National Australia Bank Ltd 15,700 13.6

Dec-09One Path Australia Ltd, ING New

Zealand LtdANZ Banking Group Ltd 45,000 11.0

Mar-10 Officium Capital Ltd Snowball Group ltd 11.8

Jun-10Bupa, MBF Life, and ClearView

Retirement SolutionsMMC Contrarian Ltd 2,150 14.9

Nov-10

Tyndall Investment Management

(Australia) Ltd, Tyndall Investment

Management New Zealand (Ltd)

Nikko Asset Management Co Ltd 25,000 12.6

2009-10 AVERAGE 12.1

Mar-11 AXA Asia Pacific Holdings Ltd AMP Ltd 77,000 19.6

Apr-11 Tower Australia Group Ltd The Dai-ichi Life Insurance Company 2,750 19.2

Jul-11 Shadforth Financial Group Snowball Group ltd 8,600 10.3

Oct-11 DKN Financial Group Ltd IOOF Holdings Ltd 8,020 14.8

Dec-11 Count Financial CBA 6,200 14.6

2011 AVERAGE 15.7

Jul-12 Clearview Wealth Ltd Crescent Capital Partners 2,800 25.3

Oct-12 Plan B Holdings Ltd IOOF Holdings Ltd 2,200 15.3

2012 AVERAGE 17.7

Source: EAP, press reports, company announcements

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6. BUSINESS OVERVIEWS

WHK GROUP OVERVIEW

WHG is Australia’s 5th largest accounting firm and provides accounting and related services to small medium enterprises (SME) and high net worth clients through its network of 19 member firms across Australia and New Zealand.

The Business Services Division provides a full range of traditional accounting and specialist services including accounting, taxation, audit and assurance, estate planning, business advisory and corporate advisory

services. This Division remains the Group’s core business activity and provides a relatively stable income and client base, as well as offering a large client referral platform for the Financial Services divisions of member

firms The Financial Services Division provides financial planning, risk insurance, self managed superannuation and

finance broking services. The Group collectively services in excess of 200,000 clients through its network of 100 offices.

Key recent events include:

Recently appointed CEO, John Lombard, has taken the focus of WHG away from an acquisition-driven model to a focus on improving operational efficiency. He recently instituted a new staff remuneration model (to align more with an individual’s contribution to firm profitability overall) and a shared services project to reduce costs.

However, this has created uncertainty with more than 20 senior executives reported to have left the firm in the last 12 months. In July 2012, almost one-third of WHG’s Sydney principals departed, apparently in protest at a

the new remuneration model, including two of the firm’s top earners.

The question is whether this is: (i) an indication that a new staff remuneration model has not been well received, and hence an omen of future staff instability; or (ii) a positive attempt to reward and retain outperformers, with the loss of departed staff unlikely to impact the firm’s earnings power.

Low organic revenue growth, with only 1.4% revenue growth in FY11 and 4.0% in FY12.

TABLE 5: WHG REVENUE COMPOSITION

A$M FY10 FY11 FY12% change

FY11-FY10

% change

FY12-FY11

% FY10

total

% FY12

total

Business Services - Australia 249 252.5 262.7 1.4% 4.0% 60.3% 63.6%

Business Services - New Zealand 63.3 56.2 59.1 -11.2% 5.2% 15.3% 14.3%

Financial planning - Ongoing 52.2 51.4 45.7 -1.5% -11.1% 12.6% 11.1%

Financial planning - Upfront 8.4 6.8 6.5 -19.0% -4.4% 2.0% 1.6%

Risk insurance 7.2 7.5 7.7 4.2% 2.7% 1.7% 1.9%

General insurance 2 2.4 2.9 20.0% 20.8% 0.5% 0.7%

Finance broking 8.7 7.8 7.1 -10.3% -9.0% 2.1% 1.7%

SMSF administration 22.1 21.4 21.6 -3.2% 0.9% 5.4% 5.2%

Total revenue 412.9 406.0 413.3 -1.7% 1.8% 100.0% 100.0%

Source: Company Reports

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SFW GROUP OVERVIEW

SFW provides a full range of wealth management services to high net worth and affluent clients, including strategic financial advice, portfolio administration solutions, portfolio construction and management services, insurance (both general and risk) solution, finance broking, stockbroking and corporate superannuation services. SFW is far more vertically up and down the value chain than WHG.

TABLE 6: SFW REVENUE COMPOSITION

CHART 2: SFW BUSINESS MODEL OVERVIEW

Source: SFW

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Financial Advice Providers (51% Net Operating Revenue)

Shadforth Financial Group (End-to-end) o SFG derives financial advice revenue through SFG’s end-to-end model. SFG deals mainly with HNW

individuals, and employs ~120 advisers and accountants from recent acquisitions.

Outlook (End-to-end) o Outlook Financial Solutions offers scaled corporate super solutions and operates under an end-to-end

model. It employs seven relationship managers. Western Pacific (Affiliate)

o Western Pacific is a financial planning dealer group operating under SFG’s affiliate advice model. With adviser principals retaining ownership of their own practices, SFG provides AFSL licensing, dealer

services, and portfolio administration and management solutions to the practices.

o Advisers have signed dealer contracts that are 50 years from date of acquisition under which SFG is entitled to 20% of the dealer’s advice and insurance revenue and 100% of any portfolio administration and portfolio management revenue received.

o SFG recently implemented an incentive scheme whereby SFG only earns 10% (as opposed to 20%) on revenue above a certain growth hurdle threshold. Whilst this results in a relatively lower reported advice revenue figure than the end-to-end model, it is offset by what would be a relatively lower cost/income ratio.

Actuate (B2B) o Actuate is SFG’s third party/B2B services business which provides portfolio administration (platform)

and portfolio management solutions to third parties. SFG may provide AFSL licensing services where it earns licensing fees (i.e. QT Financial Planning).

o B2B FUA is derived from the Actuate business, where SFG licenses third parties/associates and is largely QT Financial Planning (a JV between SFGA and Queensland’s Mutual Bank).

Group Advice Support and Implementation Services (~36% Net Operating Revenue)

Mosaic Portfolio Advisers o Mosaic generates portfolio management revenue from portfolio construction and specialising as a

manage-the-manager. It is also the Responsible Entity (RE) for its managed funds. o Fees are structured as a management fee (which covers expense recoveries related to each fund) and a

performance fee on some funds. o As Mosaic acts as a manage-the-manager, it pays away investment management costs and retains fees

for RE/fund compliance/packaging costs (which cover the custodian and fund administration costs that are outsourced), so essentially it earns a packaging margin on the FUM.

finHQ o SFG derives revenues from portfolio administration via its platform packaging business, being

aggregated under the new “finHQ” brand.

o finHQ is intended to be a web-based portal for consolidating client portfolio reporting, and will front the development of the group’s platform strategy.

o This includes the group’s platform relationships with BT, Asgard and Colonial/Symetry, having appointed Symetry as the administration provider for enhanced Group portfolio services (MPS&DPU – managed accounts). BT and Symetry are being rebranded to finHQ by November 2012.

o SFG intends for finHQ to progressively become a consolidated view of a client’s portfolio and effectively an online marketplace for other financial products and services.

Cortex

o Cortex is a non-revenue generating internal advisory service assisting Shadforth, Outlook and Western Pacific to retain quality and grow.

o It provides online investment research, technical, tax and strategy support to SFG businesses and

clients and aims to continuously improve advice and advice processes. o It implements new initiatives (such as the new MDA offering) and generally ensures consistency across

the brand family and marketing.

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Client Fees

The fees that a private client pays depends on both the types of services it receives as well as the provider of the advice – i.e. whether it is directly (end-to-end) via Shadforth/Outlook or through an affiliate (Western Pacific). The fee a private client is paying for advice will be at a high level broadly similar between Shadforth, Outlook, Western

Pacific and the rest of the industry, but SFG receives different proportions of the client fee paid for advice. (I.e. SFG receives 100% of the advice fee from Shadforth and Outlook, but 20% of the advice fee from Western Pacific).

End-to-end

Assuming a client pays for funds management, platform administration and financial advice through the end-to-end model, the client would be paying between 150-200 bps, consistent with industry pricing. SFG earns 100% of the

advice fee (generally between 70-100 bps for private clients), a margin on the portfolio administration/platform fee, and a margin on the portfolio management/funds management fee.

Total margin earned by SFG is 111bps:

o FUM average margin: 11 bps.

o FUAdmin average margin: 37 bps. o FUA average margin: 63 bps (margin is somewhat diluted by Corporate Super fees which are materially

lower than private client fees).

Affiliate

Clients could expect to pay broadly the same in the Western Pacific model to the end-to-end model, although SFG

earns only 20% of the advice fee (as opposed to 100%). The client could expect to pay close to 150 bps as the bulk of the fees are paid out in advice (~80 bps). SFG generates margins of ~15 bps on this advice, being roughly 20%.

B2B

Clients again will pay similar fees to industry averages and SFG earns similar margins on its end-to-end and affiliate models on its portfolio platform and funds solutions provided to third parties.

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FINANCIAL SUMMARY

Sfg Australia SFW

As at: 29/10/2012 Recommendation: Positive Share Price $0.45

Year end June 2011A 2012A 2013E 2014E

INCOME STATEMENT

Sales Revenue $m 127 132 132 137 Consolidated EBITDA $m 39 42 46 49 D&A $m (1) (1) (1) (1) Consolidated EBIT $m 38 41 44 48 Net Interest $m 0 0 1 2 Tax Expense $m (12) (12) (14) (15) Associates/Minorities $m 0 0 0 0

Adj NPAT $m 27 29 32 35

NRIs $m (1) (17) 0 0 Reported NPAT $m 26 12 32 35

Shares on Issue (end period) m 727 730 730 730 EFPOWA m 708 749 749 749

EPS ¢ 3.9 3.9 4.3 4.7

DPS ¢ 2.5 2.0 2.6 2.8 Franking % 100% 100% 100% 100%

GROWTH/PROFITABILITY RATIOS

Sales Growth % % 4.2% (0.2)% 4.1% EBITDA Growth % % 6.8% 8.9% 8.1% EBIT Growth % % 6.6% 9.1% 8.1%

EPS Growth % % (0.2)% 10.3% 9.6%

EBITDA/Sales % 30.9% 31.7% 34.5% 35.9% EBIT/Sales % 30.0% 30.7% 33.5% 34.8% EBIT Interest Cover x (89.6) (94.6) (50.3) (29.0) Tax Rate % 30.1% 30.2% 30.0% 30.0%

ROE % 17.5% 18.8% 19.1% 19.3% ROFE % 43.4% 30.0% 33.5% 36.3%

CASH FLOW

EBITDA $m 39 42 46 49 Change in Working Capital $m 4 (4) 2 0 Other $m (19) (3) 0 0

Gross Operating Cash Flow $m 24 35 47 49

Net Interest Paid $m 1 1 1 2 Tax Paid $m (8) (13) (12) (13)

Net Operating Cash Flow $m 17 23 36 38

Maintenance Capex $m (3) (2) (2) (2)

Free Cash Flow $m 14 21 34 35

Dividends Paid $m (13) (15) (17) (22) Expansionary Capex $m 0 0 0 0 Acquisitions $m 9 (8) 0 (3) Asset Sales $m 0 1 0 0 Dividends Received $m 0 0 0 0 Shares Issues/Buybacks $m (12) 0 0 0 Other $m 1 0 0 0

Increase in Net Cash/(Debt) $m 0 0 18 11

GOCF/EBITDA % 62% 85% 104% 100% Total Capex/Sales % 2.1% 1.4% 1.6% 1.6% Total Capex/Depreciation x 2.4 1.5 1.6 1.5

Year end June 2011A 2012A 2013E 2014E

VALUATION METRICS PER x 11.6 11.7 10.6 9.6 P/EG (2YR) x 1.2 0.6 0.6 0.7 Dividend Yield % 5.6% 4.4% 5.7% 6.2% EV/EBITDA x 7.9 7.4 6.4 5.7 EV/EBIT x 8.1 7.7 6.6 5.9 P/FCF x 22.8 15.7 9.6 9.3 P/BV x 2.6 2.2 2.0 1.8

BALANCE SHEET

Assets Cash $m 33 19 37 48 Working Capital $m 15 16 15 16 PP&E $m 6 5 6 10 Intangibles $m 144 155 146 146 Investments $m 6 5 6 6 Other $m 7 5 4 2

Total Assets $m 211 207 214 228

Liabilities Debt $m 15 2 2 2 Working Capital $m 25 27 21 21 Other $m 17 26 26 26

Total Liabilities $m 57 55 49 48 Equity $m 154 152 165 180 Capital Employed $m 136 134 130 134

Net Debt/(Cash) $m (18) (18) (35) (46) Net Debt/Equity % (12.0%) (11.6%) (21.3%) (25.7%)

Net Debt/Debt+Equity % (13.6)% (13.1)% (27.1)% (34.6)%

Net Debt/EBITDA x (0.5) (0.4) (0.8) (0.9) Working Capital/Sales % (7.7%) (7.9%) (4.4%) (3.5%) D&A/PP&E % 19.0% 23.2% 21.2% 14.0%

DCF VALUATION $m $/share

Risk Free Rate 6.5% Equity Value 352 $0.48 Market Risk Premium 6.0% (Net Debt)/Cash 18 $0.02 Beta 1.30 Franking Credits $0.07

WACC 13.5% DCF Valuation $0.54

Group Revenue $m 127 132 132 137

Group EBITDA $m 0 0 0 0

Group EBITDA/Sales % 0.0% 0.0% 0.0% 0.0%

DIVISIONAL SUMMARY

27%

29%

31%

33%

35%

37%

39%

2011 2012 2013 2014

Margin Trends

EBITDA/Sales EBIT/Sales

-105

-90

-75

-60

-45

-30

-15

-36%

-32%

-28%

-24%

-20%

-16%

-12%

2011 2012 2013 2014

Gearing & Interest Cover

Net Debt/Net Debt+Equity (%) EBIT Interest Cover (x)

15%

20%

25%

30%

35%

40%

45%

2011 2012 2013 2014

Return Trends

ROE ROA ROFE - Reported

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RESEARCH RECOMMENDATION DEFINITIONS Positive Stock is expected to outperform the S&P/ASX 200 over the coming 24 months

Neutral Stock expected to perform in line with the S&P/ASX 200 over the coming 24 months Negative Stock is expected to underperform the S&P/ASX 200 over the coming 24 months Speculative Stock has limited history from which to derive a fundamental investment view or its prospects

are highly dependent on event risk, eg. Successful exploration, scientific breakthrough, high commodity prices, regulatory change, etc.

Suspended Stock is temporarily suspended due to compliance with applicable regulatory and/or Evans & Partners policies in circumstances where Evans & Partners is acting in an advisory capacity.

Not Rated Stock is not included in our investment research universe. Research Criteria Definitions

Recommendations are primarily determined with reference to how a stock ranks relative to the S&P/ASX 200 on the following criteria: Valuation Rolling 12 month prospective multiples (composite of Price-to-Earnings Ratio, Dividend

Yield and EV/EBITDA), or long-term NPV for resource stocks.

Earnings Outlook Forecast 2 year EPS growth.

Earnings Momentum Percentage change in the current consensus EPS estimate for the stock (rolling 1 year forward basis) over the consensus EPS estimate for the stock 3 months ago.

Shareholder Returns Composite of forecast ROE (rolling 1 year forward basis) and the percentage change in

ROE over 2 years.

Debt Servicing Capacity Rolling 12 month EBIT Interest Cover ratio. Cyclical Risk Qualitative assessment of the 2 year outlook for a stock/industry’s profit cycle. Industry Quality Qualitative assessment of an industry’s growth/returns potential and company specific

management capability.

Financial Transparency If we don’t understand it, we won’t recommend it.

For stocks where Evans & Partners does not generate its own forecasts, Bloomberg consensus data is used. Analysts can introduce other factors when determining their recommendation, with any material factors stated in the written research where appropriate.

13

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RESEARCH ANALYST CERTIFICATION

I, George Gabriel, CFA, hereby certify that all the views expressed in this report accurately reflect my personal views about the subject investment

theme &/or company securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific

recommendations or views expressed in this report.

RESEARCH ANALYST DISCLOSURE OF INTEREST

I, George Gabriel, CFA, &/or entities in which I have a pecuniary interest, have an exposure to the following securities &/or managed products: TGA.

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