Promethean Overweight - zkiz.commembers.zkiz.com/storage/9055/2012_10_03_15_29_52_JPM...Promethean...

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Europe Equity Research01 March 2012

PrometheanOverweightPRWP.L, PRW LN

Across the Board: We Revisit our Investment CasePrice: 70p

Price Target: 89p

UK Small & Mid Caps

Alexander Mees AC

(44-20) 7742-3681

[email protected]

Victoria Prior, CFA

(44-20) 7155 6166

[email protected]

Jolyon S Wellington

(44-20) 7155-4558

[email protected]

J.P. Morgan Securities Ltd.

Promethean World Plc (PRWP.L;PRW LN)

FYE Dec 2011A 2012E 2013E 2014EAdj. EPS FY (p) 8.2 7.3 8.1 9.0Revenue FY (£ mn) 223 228 239 257EBITDA FY (£ mn) 31 30 33 37EBIT FY (£ mn) 23 20 22 24EBIT margin FY 10.5% 8.6% 9.2% 9.5%DPS (Net) FY (p) 2.50 2.60 2.70 2.80Adj P/E FY 8.5 9.6 8.7 7.8EV/EBITDA FY 3.4 3.5 3.0 2.6Source: Company data, Bloomberg, J.P. Morgan estimates.

Company DataPrice (p) 70Date Of Price 29-Feb-12Price Target (p) 89Price Target End Date 31 Mar 1352-week Range (p) 86 - 43Mkt Cap (£ bn) 0.1Shares O/S (mn) 200

See page 22 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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Price Performance

Promethean is, in our opinion, well placed to resume its growth trajectory as budgetary constraints on global education expenditure begin to beloosened and the company increases its penetration of emerging markets. We believe earnings have stabilised after the difficulties of 2010-11 and will move upwards once again during 2012. The fundamental business proposition is, in our view, unchanged and continues to hold considerable potential for the creation of long-term shareholder value. We maintain an Overweight rating with a March 2013 price target of 89p per share.

Growth potential remains. Promethean is one of the largest global providers of education technology. It controls more than a quarter of the worldwide market for interactive whiteboards (IWB), its core product. There is evidence to suggest that the effective use of such technology in the classroom can enhance the learning process. IWB units are already widely used in the UK, but penetration lags in the US and, to a greater extent, in parts of Europe and the major emerging economies of Asia.

Positive revenue trajectory from 2012. The strong top-line growth experienced by Promethean over the past few years was interrupted in H2 10 as a global reduction in public education spending, particularly in the US, impacted the availability of funds to schools. A rapid restitution of pre-recession levels of growth in investment in schools is unlikely, but education budgets in the US and Europe are rising gradually and will, we expect, drive increased demand for interactive technology. We expect this to be complemented by growth in emerging markets.

Considerable valuation upside potential. In our opinion, Promethean’s current share price does not capture the potential of the business to create long-term shareholder value through increased global penetration of its product suite. Our DCF valuation is 104p per share, more than 40% higher than the current traded price. Promethean is trading at a FY13E EV/EBITDA of 3.0x, which see as undemanding given the company’s long-term growth prospects.

This document is being provided for the exclusive use of STEPHEN CHENG at WORLD-WIDE INVESTMENTCO. LTD, THE

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Alexander Mees(44-20) [email protected]

Table of ContentsInvestment Case.......................................................................3

Valuation and Price Target ......................................................................................3

Promethean...............................................................................4

Product Groupings ..................................................................................................4

Geographic Footprint ..............................................................................................6

Sales and Distribution Model...................................................................................6

Corporate History....................................................................................................7

Earnings Estimates ..................................................................8

Volumes, ASP and Revenue....................................................................................8

Profitability...........................................................................................................10

Other Key Estimates..............................................................................................11

Is this the Future of Education?............................................12

Steady Growth in Global IWB Adoption................................................................12

The Application of Technology in the Classroom...................................................14

What has happened in the Key Markets?.............................15

US Education........................................................................................................16

UK Education .......................................................................................................16

European Education ..............................................................................................17

Competitive Landscape: A Concentrated Market Structure.....................................18

Appendices .............................................................................19

Corporate Directory ..............................................................................................19

Board and Management.........................................................................................19

Valuation Methodology and Risks ........................................20


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Investment Case

We maintain an Overweight recommendation.

Valuation and Price Target

Our price target is 89p per share, dated March 2013. This is the weighted average of our 104p per share (25%) DCF valuation and our 84p per share (75%) multiples-based valuation (Table 1). The weighting favours multiples-based analysis as we believe the marginal investor will require more evidence of a recovery in earnings growth momentum before applying greater emphasis to a long-term DCF valuation.

Table 1: Price target

Value Weighting Weighted ValueDCF 104p 25% 26pMultiples-based 84p 75% 63pTotal 100% 89p

Source: J.P. Morgan.

DCF valuation

Our 104p per share discounted cash flow (DCF) valuation applies a WACC of 10.0% to explicit earnings estimates to FY19. Our WACC uses an equity beta of 0.9. A terminal growth rate of 2% is applied.

Table 2: DCF valuation

£ in millions p/share

Explicit cash flows 106.6 53Terminal cash flows 111.9 56Firm value 218.5 109Less: Net debt (10.3) (5)Total equity value 208.2 104Number of shares 200.0

Source: J.P. Morgan.

Multiple-based valuation

Our multiples-based valuation applies the average FY1 and FY2 PER (using Bloomberg consensus estimates) of a group of selected peer companies in UK-listed technology companies (Table 3).

Table 3: Multiples-based valuation

FY12E PERCSR 11.7xKofax 13.9xPace 6.4xRM 9.6xSpirent 15.9xAverage 11.5xPRW FY12E EPS estimate 7.3pImplied valuation 84p

Source: J.P. Morgan, Bloomberg consensus.

Our price target is 89p per share, dated March 2013.


4



Promethean

Promethean is one of the largest global providers of education technology. It has an integrated product portfolio that includes a range of hardware and software solutions. Its primary hardware offerings are interactive display systems, or whiteboards, and handheld learner response systems. This technology utilises software developed in-house by Promethean. Educational content are teacher resources are shared on Promethean Planet, which, with more than 1,200,000 members, is the largest interactive whiteboard community in the world. Promethean’s primary market is education (schools, colleges and universities), but it also supplies product for training purposes into business and government.

Product Groupings

Promethean derives income from the sale of:

Interactive display systems (IDS)

Learner response systems and assessment (LRS)

Interactive display systems

IDS form the mainstay of Promethean’s income, having averaged 85% of group revenue over the past two and a half years. IDS primarily constitute ‘interactive whiteboards’, whiteboards with an electronic surface. The unit is connected to a laptop computer running Promethean's presentation software, ActivInspire. The image is projected onto the whiteboard normally by a short-throw integrated projector. An electronic stylus is used to navigate and manage the content projected onto the surface of the whiteboard.

Promethean offers two types of IDS: the core ActivBoard product (Table 4, Figure 2) and the smaller format ActivPanel. The ActivPanel is a 21.5-inch portable LCD mini-board that is used to navigate presentation material that can be projected onto any surface. An even smaller format product, ActivSlate, has been developed. In early 2012, Promethean unveiled its latest hardware development, a 46-inchinteractive table (ActivTable).

Table 4: Promethean’s ActivBoard range

ActivBoard 500 Pro ActivBoard 300 Pro ActivBoard 100Size 87", 95" 78". 87", 95" 78"Integrated speakers and amps Yes Yes NoMulti user capability Yes Yes NoMobile or fixed Both Both FixedPrice point Higher Mid-range Lower

Source: Company data, J.P. Morgan.

We estimate an average selling price for Promethean’s IDS in FY12 of £1,028 (North America: $2,312, £1,479; International £771). We estimate actual sales prices range from £800 to £3,500. The ActivTable is expected to have a price point of approximately $7,500. International IDS ASPs are lower as there is generally a higher proportion of entry-level products in the sales mix.

With a suite of products that comprises interactive display

systems, learner response

systems, associated software and online content, Promethean

is one of the largest global

providers of education technology.

Figure 1: FY12E revenue by sector

£ in millions

Source: J.P. Morgan estimates.

Figure 2: ActivBoard 500 Pro

Source: Company reports.

198.1

29.5

Interactive Display Systems

Learner Response Systems


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Learner response systems and assessment

LRS are an electronic solution that allows a group of people, typically a class of schoolchildren, to interact with their teacher through real-time responses to questions. Promethean offers three types of LRS:

ActivEngage: A software product that is hosted by non-Promethean devices such as laptops and tablets. For schools whose students are already equipped with individual computers or tablets, this obviates the need for investment in separate devices. The use of mobile tablets in schools represents a challenge to Promethean as it may divert budget away from its hardware, but also an opportunity as they can be used to host Promethean’s software and increase the penetration of its technology and content. Integration of multiple devices will be a key focus for Promethean.

ActiVote: A handheld, wireless device with a simple six button (marked A-F)interface. Using this device, students can give an instant response to a multiple choice question set by the teacher.

ActivExpression2: A handheld, wireless device with a backlit LED screen and keypad. This allows students to respond with alphanumeric answers to questions set by the teacher. The ActivExpression2 is Promethean's second generation keypad LRS, superseding the ActivExpression in Q4 2011.

We estimate an average selling price for Promethean’s LRS in FY12 of £30.19 (North America: $49.57, £31.71; ROW £24.05). They are generally sold in sets of around 32 units. Individual hardware range in price from approximately £15 for an ActiVote unit to approximately £50 for an ActivExpression2 unit.

Other interactive tools and content

Promethean sells a range of accessories for its IDS including audio equipment, cameras, pens and wands, remote controls and tablets. Standalone Promethean software is sold under the ActivInspire banner and Promethean ActivOffice banner, which interfaces with Microsoft PowerPoint.

The Promethean Planet website hosts more than 50,000 teacher resources and development materials such as lesson content that can be used with Promethean software. These are free to download. Promethean Planet also makes available paid content from publishers including National Geographic, Scholastic, Dorling Kindersley and DGP Publishing. Promethean Planet does not currently generate material direct revenue; its use is as a marketing tool to promote the broader Promethean product suite. The site has a broad reach, with more than 1,200,000 members and over 20 million downloads to date.

The convergence of content and platform

Promethean has formed a partnership with Channel One for the development of an interactive daily news programme in the US, Channel One News InterActiv. We believe this may help cement Promethean’s position in the US market by offering a differentiated product with applicability in the classroom. Promethean has also formed a collaboration with Houghton Mifflin Harcourt for the development of interactive mathematics lessons to US common core standards.

Figure 3: ActivTable


Figure 4: ActiVote


Figure 5: ActivExpression2



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Geographic Footprint

North America

Over the past few years, Promethean's principal market has been North America, which accounts for nearly 60% of IDS sales and approximately 90% of LRS sales. The company’s US offices are in Atlanta GA and Seattle WA.

United Kingdom

Corporate headquarters and the development laboratory are in the UK at Blackburn, Lancashire. There is also an office at Maidenhead, Berkshire.

Other global locations

There are offices in Australia, Bahrain, China, France, Germany, Hong Kong and Singapore. Promethean’s two main manufacturing facilities are positioned next to each other in Shenzhen, China. Production capacity is 325,000 units pa (approximately double the current output). The buildings were constructed in 2005.

Figure 6: Promethean's global presence

Source: J.P. Morgan, Company data.

Sales and Distribution Model

Promethean has an indirect sales model based on a network of distributors and resellers. Its global network of offices acts as coordinators of this network as well as managing large individual orders directly. The sale of Promethean products occurs in one of three ways:

Centralised (tenders from federal government education ministries);

Promethean Office

Head office / laboratories

Manufacturing facilities

An indirect sales model based

on a network of distributors and

resellers.


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Semi-decentralised (sales orders at a state or regional level); and

Decentralised (sales orders from individual schools).

In the US, sales are generally semi-decentralised (school districts). In the UK, sales are generally decentralised (individual schools).

Figure 7: Distribution model


Corporate History

Promethean was founded by entrepreneur Tony Cann in the mid-1990s. A brief summary of the history of the business is as follows:

1990s Tony Cann develops interactive whiteboard product.

2001 ActivStudio software launched.

2003 ActivPrimary software and ActivSlate hardware launched. Promethean awarded Queen’s Award for Innovation.

2004 UK private equity group Apax Partners took a 23% equity stake in Promethean. ActiVote launched.

2005 First 95-inch widescreen IDS launched. Neil Johnson appointed CFO.

2006 Promethean Planet launched. Begins transfer of manufacturing to China.

2007 Jean-Yves Charlier appointed CEO. Manufacturing fully transferred from the UK to China.

2008 ActivExpression launched.

2009 ActivInspire software launched.

2010 Promethean lists on the London Stock Exchange.

2012 Interactive table, ActivTable, unveiled.


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Earnings Estimates

Volumes, ASP and Revenue

The strong top-line growth experienced by Promethean as it built a significant share of an expanding global market was interrupted in H2 10 as a reduction in public spending on education impacted the availability of funds to schools. Period-on-period (pop) revenue growth in both the IDS and LRS divisions slowed during FY10, reversing towards the end of the year.

LRS experienced a 28% decline in revenue in FY11, driven mainly by a decline in volumes in its main market of North America. Market conditions remain challenging in North America and we expect these to continue to weigh on LRS volumes until H212 at the earliest.

IDS has not experienced the same degree of top line volatility in recent years as LRS. The decline in IDS revenue in FY11 was only 1%, although this masks a sharp decline in North America (volumes down 21%) offset by a sharp rise in International (volumes up 26%). We forecast 1.0% growth in IDS revenue in FY12, weighted to the seasonally stronger second half.

Figure 8: Revenue growth (pop)


Table 5: Revenue by division

£ in millions

FY09A 1H10A 2H10A FY10A 1H11A 2H11A FY11A 1H12E 2H12E FY12E FY13E FY14E

Interactive Display Systems 173 103 95 198 95 101 196 93 105 198 207 222- North America 101 62 56 117 55 52 107 50 53 103 109 119- International 72 41 39 81 41 49 89 43 52 95 98 103Learner Response Systems 32 19 18 37 13 14 27 14 16 30 32 35- North America 27 17 16 33 11 12 23 12 13 25 27 29- International 5 2 2 4 2 2 4 2 3 5 5 6Group 205 122 113 235 108 115 223 107 120 228 239 257

Source: J.P. Morgan estimates, Company data.

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Interactive Display Systems Learner Response Systems Group

We expect positive growth in both IDS and LRS revenue in

FY12. The North American

market remains challenging but appears to have stabilised, and

there are growth opportunities

elsewhere.


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Figure 9: Distribution of historic revenue by product segment£ in millions

Source: J.P. Morgan, Company data.

Figure 10: Distribution of forecast revenue by product segment£ in millions


Table 6: Volumes and ASP

FY09A 1H10A 2H10A FY10A 1H11A 2H11A FY11A 1H12E 2H12E FY12E FY13E FY14E

IDSVolume ('000) 161 90 89 179 81 102 183 89 103 193 201 213ASP (£ per unit) 1,078 1,152 1,063 1,108 1,177 991 1,074 1,044 1,013 1,028 1,030 1,044LRSVolume ('000) 1084 596 569 1165 425 481 906 449 529 978 1032 1098ASP (£ per unit) 29 32 31 32 30 29 29 31 30 30 31 32


Promethean has a strategy of pushing its products and services into the adjacent markets of business and government (especially military). We believe this will notrepresent more than 5% of total volumes in FY12, but may be an important area of growth over the medium-term.

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Figure 11: IDS: Volumes and ASP


Figure 12: LRS: Volumes and ASP


Profitability

The structure of costs and profit is shown in Figure 13.

Figure 13: Cost composition of sales, FY12E

Source: J.P. Morgan estimates.

We expect gross margins to be maintained at a level slightly above 42.5% in FY12 (we estimate 42.6% compared to 42.9% in FY11). Promethean manufactures it products in China and is, we believe, cost competitive with any other global supplier.In its recent 3Q 2012 release, Smart Technologies reported a similar gross margin (43%) to Promethean.

Operating expenses

We estimate operating expenses (excluding depreciation and amortisation) will rise as a proportion of sales from 29.2% in FY10 and 28.9% in FY11 to 29.4% in FY12. This reflects the fixed and semi-fixed nature of cost streams and Promethean’s commitment to maintain an appropriate level of research and developmentexpenditure. Promethean pulled back on sales and marketing expenses from £51 million in FY10 to £46 million in FY11, but will increase this expenditure to an estimated £48 million in FY12. Gross research and development increased from £14 million in FY10 (6.1% of revenue) to £16 million in FY11 (7.2% of revenue). We forecast it to rise again to £17 million (7.5% of revenue) in FY12. Promethean capitalises approximately 55% of gross research and development, and amortises this typically over three years. As a result, we forecast a step-up in amortisation in FY12.

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Volume ('000) ASP (£ per unit)

57%

21%

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5%9%

COGS Sales and marketing Administration R&D (net) D&A Operating profit

Promethean’s products earn a gross margin of approximately

43%, similar to that of its main

competitor, Smart Technologies.


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Table 7: Profitability estimates

£ in millions

FY10A FY11A FY12E FY13E FY14ERevenue 235.3 222.9 227.6 239.1 256.6Cost of sales (133.5) (127.3) (130.6) (136.6) (146.6)Gross profit 101.8 95.6 97.0 102.5 110.0Gross margin 43.3% 42.9% 42.6% 42.9% 42.9%Operating expenses (ex-D&A) (68.7) (64.4) (67.0) (69.3) (73.0)- Sales and marketing (50.7) (46.1) (47.7) (49.4) (52.0)- Administrative (11.6) (11.2) (11.7) (11.8) (12.2)- Research and development (14.3) (16.1) (17.1) (17.9) (19.5)- less capitalised development expenditure 7.9 8.9 9.4 9.9 10.8Adjusted EBITDA 33.1 31.1 30.0 33.3 37.1EBITDA margin 14.1% 14.0% 13.2% 13.9% 14.4%Depreciation and amortisation (5.8) (7.7) (10.3) (11.4) (12.7)Adjusted operating profit 27.4 23.4 19.7 21.9 24.4Operating profit margin 11.6% 10.5% 8.7% 9.2% 9.5%


Other Key Estimates

A progressive dividend policy

Promethean has a progressive dividend policy. We forecast total DPS of 2.6p in FY12 and 2.7p in FY13, compared to 2.5p in FY11 and 2.4p in FY10.

No bank debt

Promethean’s net cash position at 31 December 2011 was £22 million. Our estimates project that the company will maintain a net cash position in the absence of acquisitions. Promethean does have an unused banking facility, for which it pays a fee of approximately £0.3 million pa.

Cash generative

Promethean has consistently improved the rate of conversion of EBITDA into ungeared, pre-tax operating cash flow in recent years. We expect this to continue to improve as Promethean tightens its working capital management further (Table 8).

Table 8: Cash conversion

£ in millions

FY07A FY08A FY09A FY10A FY11A FY12E FY13E FY14E

EBITDA 15.3 25.5 33.9 33.1 31.1 30.0 33.3 37.1Operating Cash Flow 2.8 21.7 22.2 (4.0) 26.2 30.4 30.4 32.3- Net Interest Paid (3.2) (1.2) (3.7) (28.7) (0.2) (0.3) (0.3) (0.3)- Taxes Paid (0.4) (2.3) (3.3) (4.4) (2.8) (4.8) (5.4) (6.1)Ungeared, Pre-Tax Operating Cash Flow 6.5 25.2 29.2 29.1 29.3 35.6 36.1 38.6Conversion Ratio 42.5% 98.5% 86.1% 88.0% 94.2% 118.5% 108.6% 104.1%


Promethean has a progressive

dividend policy and no bank

debt.


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Is this the Future of Education?

There is evidence to suggest that the effective use of technology in the classroom can enhance the learning process. The benefits are not restricted to interactive display and learner response technology alone, but they occupy a central position in the technological toolbox of education.

Steady Growth in Global IWB Adoption

Although recent fiscal pressures have affected the money available in the system to invest in all forms of classroom technology, the adoption of IWB has exhibited steady underlying growth and is forecast to continue to do so (Figure 14).

Figure 14: Global shipments of IWB (excluding China)Units

Source: Futuresource Q3 2011.

The pace of adoption has been very uneven around the world, with markets such as the US and, in particular, the UK already showing high levels of penetration. It is estimated that 77% of British classrooms and 41% of US classrooms have installed an IWB by 3Q 2011. Other large markets in the developed world have been far slower to adopt the technology: penetration rates are just 8% in France and 9% in Germany.

Table 9: Penetration of IWB by region

Number of Classrooms (m) Market Penetration of IWB

Asia 15.5 3.3%North America 4.3 35.2%Latin America 4.1 6.1%Continental Europe 3.9 14.8%Africa 3.1 0.6%Middle East 2.7 2.9%Eastern Europe 1.0 7.7%UK and Ireland 0.7 75.9%Australia and New Zealand 0.2 49.7%Worldwide 35.3 10.4%

Source: Futuresource.

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forecast to resume positive

growth in 2012, driven notably by emerging markets.

There is a wide range of IWB

penetration rates in different

countries around the world.


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Figure 15: Penetration of IWB in key markets (3Q 2011)


The uneven levels of IWB penetration around the world partly reflect variations in the ICT competency of teachers, but are mainly the result of differences in government policy and funding (Figure 16). The very high level of penetration in the UK, for example, was driven by a government initiative in 2004 and 2005.

Figure 16: Factors affecting IWB penetration in classrooms

Addressable market (‘000)

Product acceptance

Government advocacy

ICT spending ICT adoption Teacher ICT competency

Existing penetration

USA 3,450 High Medium-High Medium-High High High Medium

UK 704 High High High High Medium-High High

Netherlands 148 Medium-High Medium Medium-High Medium-High Medium-High Medium

France 621 Medium Low Low Medium Medium Low

Source: Company reports. Note: Data as at 3Q 2009.

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GermanyItaly

Netherlands

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Market size (log scale)


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The Application of Technology in the Classroom

If used effectively, the process of education can be enhanced through the use of technology for a number of reasons including:

Greater engagement between teacher and students;

Richer content through use of online resources and tools;

More accurate and efficient assessment;

Ability to use simulation, modelling and data manipulation techniques;

Use of multimedia to increase impact and variety of content delivery.

Based on our observations, we note the following key features of IWBs:

Promotes cost efficiency. IWB are particularly useful in classrooms with a limited number of computers. They can provide simultaneous access to technology for all students.

Assists in the learning process. The multi-sensory nature of IWB caters for all learning styles. They work well for students with learning difficulties. The use of different colours and media attract student attention.

Facilitates group interaction. IWB facilitate group discussions and brainstorming. The interactivity can really motivate students (although this does wear off as they become more familiar with the technology).

User-friendly. Neither teachers nor students need to be particularly experienced in the use of ICT to access and derive benefit from the technology. It can be used across all age ranges. Teachers who are ‘technophobes’ can start slowly and build up their use of the different functionality.

Portability of content. IWB can be particularly useful for teachers who move between classrooms as lesson content can be accessed wherever there is an IWB installed. IWB are useful for teachers plan lessons collaboratively. Students who are absent from class can catch up by accessing lesson content in their own time.

Portability of hardware. The ability to move an IWB between classrooms is a positive, but it can lead to problems if the hardware is mishandled while being moved.

Promethean itself commissioned the Marzano Research Laboratory to study the effectiveness of its suite of products (ActivClassroom). It found a ’17 percentile gain in student achievement’. Similarly, BECTA reported in a study of the efficacy of IWB in general a ‘consistent improvement in students' results across Key Stages 1 and 2 subjects1...indicating that embedding of the technology into the classroom and teacher experience with the technology are key factors.’

1 Key Stage 1= primary school students aged 5-7; Key Stage 2 = aged 7-11.


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What has happened in the Key Markets?

The global economic crisis had a detriment impact on global education budgets. The need to reduce burgeoning levels of national debt has forced cuts in public spending, from which the education sector has not been immune. One consequence has been a curtailment in funding available for interactive technology. Following a decline in global shipments of IWB in 2011, growth is forecast to resume in 2012 as education expenditure, especially in developing markets, resumes its upward trajectory (Figure 17).

Figure 17: Global shipments of IWB (excluding China)Units

Source: Futuresource Q3 2011.

The penetration of IWB outside Europe, North America and Australasia is, as might be expected, still very low (Figure 18), but there are signs that a basis for sustainable demand is starting to establish itself here too. For example, Promethean recently signed a Memorandum of Collaboration with the Mexican Secretaria of Public Education. A pilot programme run in late 2011 could, in our opinion, be followed with potentially significant sales orders.

Figure 18: IWB penetration by region


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The global economic crisis had a detriment impact on global

education budgets, but

expenditure is now rising gradually in many of the key

markets.

Emerging markets hold

considerable potential, as

evidenced by Promethean's recent collaboration with the

government of Mexico.


16



US Education

Federal expenditure has continued to rise

In the United States, education has been a key focus of successive federal governments. Since 1985, inflation-adjusted federal spending on K-12 education has increased by more than 135%, although during the Bush administration (2001-9) it ceased to increase as a percentage of GDP (Figure 19).

Figure 19: US federal education expenditure $ in millions

Source: US National Center for Education Statistics, US Department of Education.

The pace of growth has slowed since the onset of the global financial crisis in 2008. Nonetheless, in 2011, the Obama administration announced that education was exempt from the federal government’s ‘spending freeze’. The US federal budget for 2012, unveiled earlier this month, increased overall support for education, although there was a 21% cut to funding for the Race to the Top program (which supports innovation in K-12 schools).

But there is less money for individual schools

Spending cuts have been more in evidence at the State and district level, with the result that the funds available to individual schools have come under pressure. The US Government Accountability Office stated in September 2011 that 41% of schools in the US saw a reduction in funding last school year, with a further 72% anticipating further cuts during this school year.

Approximately 85-90% of US school district budgets are funded from state and local taxes.

UK Education

Spending boom of the past 10 years is at an end

The UK has experienced a considerable uplift in public spending on education over the past 10 years (Figure 20). As the Treasury attempts to reduce the public spending deficit, it seems unlikely this trend will continue. In a recent report, the Institute for Fiscal Studies projected that spending on education will fall by 13% in real terms between 2010-11 and 2014-15, dipping to 4.5% of GDP – the level it was at in the late 1990s, itself the lowest level since the 1960s (Figure 21).

6.8%

7.0%

7.2%

7.4%

7.6%

7.8%

8.0%

0

200

400

600

800

1,000

1,200

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Total % of GDP

Obama has made education

exempt from the federal

‘spending freeze’.

UK spending on education is

forecast to fall in real terms, but IWB penetration in this country

is already very high.


17



Figure 20: UK education expenditure£ in billions

Source: HM Treasury.

Figure 21: UK education spending as a percentage of GDP

Source: HM Treasury.

The expected decline, however, largely reflects a reduction in capital spending onschools following the termination of the Building Schools for the Future initiative.Although the funding available to individual schools for non-capital expenditure is considerably less affected, the already high level of IWB penetration in the UK makes it unlikely that Promethean will experience significant incremental demand in this country.

European Education

As a proportion of GDP, education spending in the EU has been stable at around 5% over the past decade, although it varies widely from Denmark (8%) to Slovakia (3%). As in the US and UK, spending on schools has been one of the areas of public expenditure least affected by recent cuts, although some regions have had little choice but to reduce budgets. The low level of IWB penetration in many EU countries means that there remains significant scope for Promethean to win supply contracts despite fiscal austerity, such as its recent agreement to equip 8,000 classrooms in Italy in 2011.

0102030405060708090

100

3

4

5

6

7

Very low level of IWB

penetration in many European countries suggests growth

potential for Promethean despite

the general climate of fiscal austerity.


18



Competitive Landscape: A Concentrated Market Structure

The global IWB market is dominated by two suppliers: Smart (47% market share) and Promethean (26%). Promethean’s market share rose from 18% in 2006 to 26% in 2009. It has been stable at that level since then (Figure 22, Table 10). Smart’s market share peaked at 54% in 2008, but has slipped considerably since then. It remains very strong in the US with more than 60% share of that market, but has lagged in developing markets.

Figure 22: IWB unit market share (K-12)


Table 10: IWB unit market share (K-12, excluding China)

2006 2007 2008 2009 2010 LTM Q3 2011Promethean 18.1% 22.1% 25.0% 25.5% 26.0% 25.6%SMART 42.8% 47.4% 53.8% 52.0% 48.6% 47.1%Other 39.1% 30.5% 21.1% 22.5% 25.4% 27.3%


Other competitors such as Hitachi tend to pitch their products at lower price points.

In the LRS market, Promethean is one of three market leaders with a global share of 26.3% (Q3 LTM 2011)2. In the same period, Smart had 27.1% share of the LRS market and eInstruction had 26.6%.

2 According to Futuresource, Q3 2011.

0%10%20%30%40%50%60%70%80%90%

100%

2006 2007 2008 2009 2010 LTM Q3 2011

Promethean SMART Other

Smart remains the market

leader, but the gap to

Promethean has narrowed.


19



Appendices

Corporate Directory

Head Office Lower Philips Road, Blackburn, Lancashire BB1 5TH, UK

Telephone (44) 1254 298 598

Website www.prometheanworld.com

Board and Management

Jean-Yves Charlier, CEO

Jean-Yves Charlier joined Promethean in 2007 from Fidelity-controlled Colt Telecommunications. He was previously with telecommunications companies BT Global Services and Equant. He owns 3% of Promethean’s share capital.

Neil Johnson, CFO

Chartered Accountant Neil Johnson joined Promethean from British Energy Group in 2005. He previously held finance positions at electronic test company Teradyne, manufacturer Courtaulds.

Graham Howe, Chairman

Co-founding director of Orange, Graham Howe, was appointed Chairman of Promethean in 2005. Previously, he worked at Hutchison Telecom, First Pacific Company and Touche Ross Management Consultants. He owns 5% of Promethean’s share capital.

Herbert Anthony (‘Tony’) Cann, Non-Executive Director

The founder of Promethean, Tony Cann acted as Chairman of the company until the appointment of Graham Howe in 2005. He has been awarded a CBE and an Honorary Doctorate from Lancaster University. He owns 33% of Promethean’s share capital.

Lord Puttnam, Non-Executive Director

Former Chancellor of the University of Sunderland and the current Chancellor of the Open University, Lord Puttnam, joined the board of Promethean in 2006. He had a long career as a film producer.

Philip Rowley, Non-Executive Director

Chartered Accountant Philip Rowley joined the board of Promethean in 2009. His career included periods at AOL Europe, Kingfisher and EMI Music.

Dante Roscini, Non-Executive Director

Dante Roscini joined the Promethean board in 2009. Now a senior lecturer at Harvard Business School, he was previously an investment banker with Morgan Stanley, Merrill Lynch and Goldman Sachs.


20



Valuation Methodology and Risks

Promethean (Overweight Price Target: 89p)

Valuation Methodology :

Our unchanged price target is 89p per share dated March 2013. This is the weighted average of our DCF valuation (25%) and our multiples-based valuation (75%). Our DCF valuation is 104p per share, which applies a WACC of 10.0% to explicit earnings estimates to FY19. Our WACC uses an equity beta of 0.9. A terminal growth rate of 2% is applied. Our multiples-based valuation is 84p per share. This applies the average FY2 PER (using Bloomberg consensus estimates) of a group of selected peer companies in UK technology hardware. The weighting favours the multiples-based valuation as we believe investors require evidence of an earnings recovery before attributing more value to longer-term DCF projections.

Risks to Our View :

Downside risks to achieving our price target include:

Promethean's revenues are affected by headwinds in US and European education budgets. Although we believe the longer-term prospects remain attractive, the near-term risk centres around margin compression in the context of budgetary pressures on public funding for education.

Promethean’s revenues might be impacted by competitive pressure from existing competitors (Smart) or from new entrants. Competitive pressure may arise from a loss of cost competitiveness or technological differentiation.


21



Promethean: Summary of FinancialsProfit and Loss Statement Cash flow statement£ in millions, year end Dec FY10 FY11 FY12E FY13E £ in millions, year end Dec FY10 FY11 FY12E FY13E

Revenues 235 223 228 239 EBIT 27 23 20 22% Change Y/Y 14.7% (5.3%) 2.1% 5.1% Depreciation & amortization 6 8 10 11

EBITDA 33 31 30 33 Change in working capital (0) (0) 6 3% Change Y/Y (2.2%) (6.0%) (3.5%) 10.8% Taxes (2) (5) (5) (5)

EBITDA Margin (%) 14.1% 14.0% 13.2% 13.9% Other operating cashflow (4) (2) 0 0EBIT 27 23 20 22 Cash flow from operations 29 29 36 36

% Change Y/Y (7.4%) (14.4%) (15.9%) 11.2%EBIT Margin 11.6% 10.5% 8.6% 9.2% Net acquisitions (6) 0 (2) 0

Net Interest (4) (1) (0) (0) Capex (15) (14) (11) (12)Adj Earning before tax 27 22 19 22 Development expenditure (0) (0) (9) (10)

% change Y/Y -9.8% -16.8% -13.6% 11.4% Other investing cash flow (0) (0) (9) (10)Tax (charge) (2) (5) (5) (5) Cash from investing activities (21) (14) (23) (22)

Tax as a % of BT 12.1% 30.6% 26.0% 26.0%Net Income (Adj) 19 16 15 16 Equity raised/repaid 106 (1) 0 0

% change Y/Y(8.3%

) (14.2%) (11.4%) 11.2% Debt raised/repaid (86) 0 (3) (3)

Shares OS - - - - Dividends paid (2) (4) (5) (5)EPS (Adj) 9.6 8.2 7.3 8.1 Other Financing Cashflow (0) 0 0 0

% Change Y/Y(7.9%

) (14.5%) (11.4%) 11.2% Cashflows from financing activities 17 (5) (8) (9)EPS (Reported) 8.5 5.6 6.9 7.7

DPS 2.40 2.50 2.60 2.70 Free cash flow to firm (19) 13 19 18Change in net debt (79) (7) (3) (3)Net (Debt) / Cash 15 22 24 28

Balance sheet Ratio Analysis£ in millions, year end Dec FY10 FY11 FY12E FY13E £ in millions, year end Dec FY10 FY11 FY12E FY13E

Property, plant and equipment 15 15 22 29 Sales growth 14.7% (5.3%) 2.1% 5.1%

Intangible 159 161 163 166 Gross Margin 43.3% 42.9% 42.6% 42.9%Inventories 20 18 19 18 EBITDA Margin (%) 14.1% 14.0% 13.2% 13.9%Trade & other receivables 33 40 40 40 EBIT Margin (%) 11.6% 10.5% 8.6% 9.2%Cash and cash equivalents 15 22 24 28 Net profit growth (8.3%) (14.2%) (11.4%) 11.2%Other assets 2 2 2 2 EPS growth (Adj) (7.9%) (14.5%) (11.4%) 11.2%Total Assets 246 259 272 285

Net debt (Cash) to equity -6.8% -9.9% -10.7% -11.7%Non current borrowings 0 0 0 0 EV/Revenue(x) 0.5 0.5 0.5 0.4Current borrowings 0 0 0 0 EV/EBITDA(x) 3.4 3.4 3.5 3.0Trade & Other Payables 27 33 39 41 EV/EBIT(x) 4.1 4.5 5.3 4.6Provisions 5 4 2 2 Dividend Yield - - - -Other liabilities 3 5 3 3 Adj. P/E(x) 7.3 8.5 9.6 8.7Total liabilities 34 40 44 46

Net Assets 212 220 228 238NAV per share 120 110 114 119Issued capital 212 220 228 238Retained Earnings (6) 0 9 19Other Equity 120 120 120 120Total Equity 212 220 228 238

Source: Company reports and J.P. Morgan estimates.


22



Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Promethean.

Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Promethean.

Broker: J.P. Morgan Securities Ltd. acts as Corporate Broker to Promethean.

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailing [email protected] with your request.

Date Rating Share Price (p)

Price Target (p)

27-Apr-10 OW 195 250

29-Oct-10 OW 97 200

03-Dec-10 OW 52 140

28-Jul-11 OW 56 97

20-Oct-11 OW 51 81

28-Feb-12 OW 66 89

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-Australia) and UK small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.morganmarkets.com.

Coverage Universe: Mees, Alexander: Cineworld (CINE.L), D S Smith (SMDS.L), De La Rue (DLAR.L), Gemfields (GEM.L), Laird (LRD.L), Pace (PIC.L), Promethean (PRWP.L), RPC Group (RPC.L), Regus (RGU.L), Spirent (SPT.L)

0

59

118

177

236

295

354

Price(p)

Mar10

Jun10

Sep10

Dec10

Mar11

Jun11

Sep11

Dec11

Mar12

Promethean (PRWP.L, PRW LN) Price Chart

OW 140p OW 81.321p

OW 250p OW 200p OW 96.685p OW 89p

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

Initiated coverage Apr 27, 2010.


mailto:[email protected]

https://mm.jpmorgan.com/disclosures/company

23



J.P. Morgan Equity Research Ratings Distribution, as of January 6, 2012

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 47% 42% 12%IB clients* 52% 45% 36%

JPMS Equity Research Coverage 45% 47% 8%IB clients* 72% 62% 58%

*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.morganmarkets.com , contact the primary analyst or your J.P. Morgan representative, or email [email protected].

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