UK Disclosures for Investment Research Recommendations

1. Background to Disclosure Requirements

The disclosures set out below are in accordance with the requirements of the UK's Financial Services Authority (the "FSA") set out in COBS 12.4 together with the FSA's associated guidance relating to research disclosures in connection with research recommendations.

2. Basis of Valuation

Banks
Our fair values are based on a straight line price to book model. The aim is to have consistent valuation inputs across the sector - so all our numbers are adjusted in the same way to achieve underlying returns. This valuation methodology compares the share price with real returns. The ROE which a company generates is compared to the cost of capital and this generates the price to book at which the stock should trade. For example a bank with a cost of capital of 10% that generates a 20% ROE should trade at a multiple of twice book. This methodology is conservative as it implies that the ROE reverts back to the cost of equity in the following year so it gives no credit to companies with superior returns over time or high growth. As a result in a few cases - namely the Asian banks we base our fair values on a price to book model that factors in ROEs above the cost of equity for three years - known as value curve. When deciding if a stock is good value or not we also take into account other variables such as PE, pre-provision multiples and dividend yield but use the price to book model to set fair value.

Insurance
Our fair values are also based on a straight line price to tangible book model. The adjustments made to stated shareholders equity to attain the tangible book are to exclude goodwill, add back off balance sheet unrealized gains, equalization reserves and any incremental present value of future profits on life business (PVFP). We then compare this price to book with the operating returns which the company earns on this tangible book to its cost of capital. Operating returns take stated net profit and exclude any one-off items, restructuring costs and realized gains on the investment portfolio. As a cross check we also follow the P/E (operating earnings as defined above) of the stocks too.

Telecoms and Technology
The valuation methodology we use for valuing companies is to apply a Discounted Cash Flow to rolling ten year cash flow forecasts. The component parts of each business are valued in this way and then added together to derive an overall valuation. The resultant Fair Value is a twelve month forward valuation i.e. what we believe the company would be worth in twelve months, and is usually the same as our Price Target for the stock. From time to time we may also issue a clearly labelled near term Price Target that differs from our underlying Fair Value. This is to take account of catalysts that may cause the stock price to under/over-shoot our Fair Value on a short term basis.

Consumer
We calculate fair value for consumer staples stocks using a methodology known as adjusted present value (APV). This requires us to discount a business' operating cash flows using its cost equity to arrive at a net present value. In addition we discount the value of the business' tax shield using the cost of debt and a target debt level. We add this to the estimated equity value already calculated, and after deducting debt and the value of minorities derive a theoretical fair value. This is theoretically the same as a conventional discounted cash flow calculation using a weighted average cost of capital, but allows us specifically to take account of fluctuating levels of debt.

Retail
Our fair values are based on an average of three 15 year valuation models - a DCF model, an EVA model (that values the spread of ROIC over WACC) and a Residual Income model (that values the spread of ROE over cost of equity). We use common assumptions across all retailers, so we use a 15 year government bond yield and a 4.5% equity risk premium to obtain our cost of equity and WACC for each company. We also assume 2% cashflow growth into perpetuity for all retailers and we add back goodwill written off to our Invested Capital. Our 12 month price targets are usually the same as our average fair value but may make reference to relative PERs, sales and profit multiples, mid term earnings growth, dividend yields, freehold asset valuations, LBO valuations and/or specific catalysts or issues likely to affect the stock within the next 12 months.

3. Further Disclosures

All prices provided within research reports are taken from the close of business on the day prior to the issue date unless explicitly otherwise stated.

Execution Limited does not produce maintenance research and as a result there is no planned frequency of reports for companies under coverage.
Research reports are produced on an ad hoc basis.

Equity Research Analysts and members of their immediate families are absolutely prohibited from purchasing or receiving securities prior to an IPO for subject companies and other companies in the industry or industries assigned.

Execution Limited does not have any major shareholdings in any issuer or any other significant financial interests in any issuer unless specifically disclosed in the research report.

Execution Limited is registered in England and Wales no 4058971, a member of The London Stock Exchange, Xetra, Virt-x EuroNext, NYSE Liffe and Nasdaq OMX and is authorised and regulated by the Financial Services Authority.