RCS - Science Group PLC - Update on Ricardo plc

ScienceAnnouncement

31/03/2025 07:15

For best results when printing this announcement, please click on link below:
https://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20250331:nRSe8351Ca&default-theme=true

RNS Number : 8351C  Science Group PLC  31 March 2025

 

31 March 2025

 

Science Group plc

(the "Group" or "Science Group")

 

Update on Ricardo plc

 

Science Group shareholding in Ricardo plc ("Ricardo") is 10,483,684 shares,
equivalent to approximately 16.85% of the voting rights. The average cost
(including brokerage fees) is 232 pence per share. Science Group may or may
not increase its shareholding in Ricardo.

 

Science Group and Ricardo provide similar consultancy services and engineering
systems. Science Group issued its Annual Results for the year ended 31
December 2024 on 24 March 2025. In stark contrast to the Ricardo Interim
Results (released on 5 March 2025), Science Group reported robust operating
margins, record earnings per share and strong cash conversion, despite the
same challenging "market headwinds" that Ricardo blamed for its weak
performance, poor cash flow and materially downgraded forecasts. Science Group
actually delivers the margins that Ricardo aspires to.

 

Science Group set out its concerns to the Ricardo Board in the announcements
of 14 and 17 March 2025 and in a 90 minute meeting with the Senior Independent
Director and an advisor. In RNS responses, Ricardo has consistently ignored
the serious matters raised and instead has sought to criticise Science Group
for acquiring shares in the open market at levels around the Ricardo 15 year
low. The irony of the Ricardo Board comments is readily apparent and the
responsibility for the destruction of shareholder value (65% peak to trough
share price reduction) lies squarely with the Ricardo Board.

 

Science Group notes Ricardo's announcement on 28 March 2025, which continues
to try to deflect attention from the core issues. Contrary to the 'victim'
narrative presented by the Ricardo Board, the strategy and financial targets
were defined by Ricardo in 2022 and were reiterated by the Ricardo Board as
recently as September 2024. The Ricardo Board seeks to blame external factors
for its under-performance rather than address its own mismanagement.
Furthermore, the statement that Ricardo "continues to trade in line with the
Board's expectations" conveniently omits the fact that these expectations were
significantly downgraded only a few weeks ago. (The 20% downgrade for the
current year (continuing businesses) was extraordinary after the strong
assurances in September 2024 and just 3 weeks after the highest valued
acquisition in Ricardo history, but the future outlook was even worse with
house broker analyst forecast downgraded by 31% in FY2026/27.)

 

Furthermore, the rhetoric that potentially replacing the current Chairman of
Ricardo and appointing a single director nominated by Science Group to  the
Ricardo Board "would give Science Group effective control of the Board without
paying a premium" is blatantly absurd. This repeated claim by the Ricardo
Board is also selective and hypocritical since a current Ricardo director is
in fact a nominee of a major shareholder yet there has been no similar
accusation. Therefore, and consistent with the lack of substantive responses
to Science Group analysis, it must be presumed that the real concern of the
Ricardo Board is the scrutiny and governance improvements that Science Group
would demand, to the benefit of all Ricardo shareholders.

 

To reiterate Science Group concerns  :

 

·    Failure to deliver the profitability targets set out in the 2022
strategic plan. As recently as 11 September 2024, the Ricardo Board
reconfirmed that the company was "On track to double underlying operating
profit in the five years to 2026/27". Unfortunately, not only was that an
inaccurate declaration, but when it became apparent that failure was probable
and the aspiration challenging, rather than taking the necessary remedial
action, the Ricardo Board abolished/diluted the targets.

 

Among the various Ricardo excuses, the Ricardo Board highlights short-term
"market  headwinds" for their failure, despite one independent analyst in
September 2024 describing the Ricardo plan as requiring a "Goldilocks period"
to meet the forecasts. Similar analysis led Science Group to anticipate the
Ricardo January profit warning. However, Science Group has experienced similar
market conditions to Ricardo yet still delivered record profitability in FY24,
through effective governance and disciplined cost and operational management.

 

The Ricardo announcement on 28 March 2025 highlights the reported margins on
Energy & Environment and Rail, but ignores the fact that the margins are
inflated by the non-allocation of some shared services costs (which it is
understood account for around half of the reported PLC costs). Ironically, the
very high PLC costs are justified by Ricardo using the converse argument, so
it is disingenuous for  Ricardo to exclude them from segment commentary. The
impact of allocating these costs would be a material reduction in the reported
segment margins referenced in the 28 March RNS, a reporting change that should
be done to improve transparency of Ricardo segment profitability.

 

(Science Group, by contrast, allocates all shared services costs into the
business units. Therefore the segmental margins achieved by Science Group have
an even wider deviation from the reported Ricardo segment margins. This delta
is further compounded by the diversity of "specific adjusting items" excluded
by Ricardo in its Underlying Operating Profit definition, which further
inflates Ricardo reported margins. While "adjusting items" can be difficult
for shareholders to analyse, compare and interpret, cash balances (ie real
cash generated by a business) are far less subject to accounting
adjustments/interpretations. The Ricardo poor cash conversion is a further
cause for concern - see below.)

 

·    Inadequate financial processes/forecasting/controls. Just a few
months prior to the January profit warning, on 11 September 2024, the Ricardo
Board asserted unequivocally that the "Robust year end order book and good
pipeline visibility gives confidence for FY 2024/25". Furthermore, the house
broker noted as recently as December 2024, that "We believe that the ongoing
business continues to trade well", presumably reflecting dialogue with the
company.

 

Either Ricardo financial processes and controls are inadequate or there must
be questions of competency. In either case, the company clearly does not have
the governance to pursue acquisitions, and certainly not on the other side of
the world (3 of the last 4 acquisitions have been undertaken in Australia).
Science Group believes that Ricardo needs to establish solid foundations
before layering on risk and complexity. Growth via acquisition is not a
substitute for disciplined operational and cost management.

 

Science Group has informed the Ricardo Board that it will not support any
further Ricardo acquisitions until a consistency of performance has been
demonstrated. In  view of the January events, any acquisitions or disposals
should be subject to shareholder approval.

 

·    Poor cost control and productivity. While "market headwinds" can be
outside a company's control, the very high corporate costs at Ricardo are not,
yet are wholly disproportionate to the market capitalisation of the company.

 

Similarly the Ricardo poor productivity should have been addressed by the
Ricardo Board. Ricardo revenue per head (c.£130,000 based on FY 2023/24,
excluding Defense) is materially lower than Science Group. Indeed, the
difference in productivity alone can reconcile the margin difference between
Science Group and Ricardo, and explain the failure of Ricardo to hit its 2022
margin targets. To be clear, if Ricardo had achieved the same productivity as
Science Group (c.£163,000 in FY23 and higher in FY24), the Ricardo 2022
margin targets would have been achieved or exceeded. (Science Group has
consistently delivered margins above the Ricardo aspirational targets).

 

Therefore, while "market headwinds" have impacted all consultancies and have
contributed to the poor Ricardo performance, the failure of the Ricardo Board
to achieve its own targets is primarily a failure to manage costs and
productivity. These are issues within the control of the Ricardo Board.

 

·    Poor cash conversion. As noted above, in H1-FY25, Ricardo reported
cash conversion of just 13% from continuing operations and a negative -5.8%
for the whole business, a serious concern but unfortunately a recurring
Ricardo under-performance for this critical business metric. This further
implies that the September 2024, much-acclaimed at the time, "excellent cash
performance" was in fact an unsustainable 'window dressing', immediately
unravelling in the following reporting period.

 

Science Group regards cash generation to be the primary metric of any business
and, while short term fluctuations do occur, actual cash generated provides a
reliable performance metric. Ricardo accounting adjustments (referenced above)
are exposed in the reality of consistently poor cash generation. In contrast
Science Group cash conversion consistently correlates with reported adjusted
operating profit.

 

·    Excessive executive remuneration has been highlighted by other
Ricardo shareholders in the past, when the market valuation was much higher,
although the response of the Ricardo Board was similarly dismissive. For a
company of Ricardo's current market capitalisation, the level of executive
remuneration is indefensible. Self-interest appears to take precedence over
shareholder value.

 

For comparison, Ricardo FY2023/24 Board remuneration totalled £2.1 million
(excluding former CFO compensation) yet the aggregate shareholding of the
Board is just 0.2%. In contrast, Science Group total Board remuneration was
around 40% lower at £1.2 million and the Board shareholdings total 21.5%.
Science Group market capitalisation is greater than Ricardo and the Board
alignment with shareholders is evidenced by the consistent index-beating
returns, contrasting sharply with the Ricardo Board destruction of shareholder
value.

 

·    Ineffective governance.  It is seriously concerning that, rather
than stabilise the business with the Defense disposal cash inflow, the Ricardo
Board immediately deployed the precious capital to the highest value
acquisition in Ricardo's history (located in Australia). To complete such a
high risk transaction just 3 weeks before issuing a major profit warning is a
serious and irresponsible failure of governance. As a result, Ricardo now has
an over-stretched balance sheet and poor cash flow, requiring the recent
amendment of bank covenants.

 

All of the above items individually and collectively provide a damning
critique of the Ricardo Board. Yet, despite the serious failings in
governance, the Ricardo Board have not accepted any responsibility and indeed
have proclaimed unanimity (14 March 2025 and 28 March 2025) of mutual support.
Such lack of accountability does not provide reassurance to shareholders and
indeed raises even more concerns regarding the lack of Board independence,
scrutiny and governance.

 

 

Ricardo Business and Strategy Update

 

Despite three RNS announcements by Ricardo in recent weeks, the above matters,
which are fundamental to shareholder value recovery, remain unaddressed. It is
at least rewarding to see that Science Group's initiative has finally
kick-started the Ricardo Board and we note the announcement that the Business
and Strategy Update ("BSU") will be set out in mid-April. However, it should
be noted that this will be the fifth corporate/strategic event in five months
:

·    December : Disposal and acquisition announced.

·    January : Completion of acquisition, followed by profit warning 3
weeks later.

·    March : Interim Results (including abolition/dilution of strategic
margin targets).

·    April : Business and Strategy Update (just one month after the
Interim Results).

 

Unfortunately, the ability to issue another new strategic plan (or BSU) is a
long way from being able to execute the plan to deliver value to shareholders,
as the Ricardo Board have demonstrated over the past 3 years. It is only six
months (11 September 2024) since the Ricardo Board declared that "Ricardo is
gaining good momentum to deliver its five-year strategic plan communicated in
May 2022", a claimed "momentum" that fizzled out in just a few months.
Accordingly, the Ricardo Board's expressed "strong confidence" in its imminent
new plan/strategy lacks credibility.

 

The Ricardo Board needs to be held to account and the Chair has ultimate
responsibility. The destruction of shareholder value cannot continue and a
timely resolution is required to prevent further damage to this once great
British company and to provide clarity and support for the Ricardo operating
managers to be able to focus on operational execution (profit and cash flow)
in order to start the business turnaround. Science Group will provide the
Ricardo Board the opportunity to present its (5(th) in 5 months) corporate
update by mid April as they have declared (i.e 15 April 2025) but, as advised
in the meeting with the Ricardo Senior Independent Director, we seek assurance
that no disposals or acquisitions will be undertaken without shareholder
approval.

 

In that regard, Science Group notes analyst commentary regarding the disposal
process related to the Performance Products division, presumably briefed by
the company, and considers that the Ricardo Board should immediately correct
any selective disclosure and provide transparency to all Ricardo shareholders
and other stakeholders.

 

Ricardo Share Register

 

As previously referenced, it is significant  that the Ricardo shareholder
base has materially changed since the January profit warning. Four
shareholders now account for approaching 60% of the issued share capital of
Ricardo and a further 10% is held by a further handful of holders. Director
shareholdings remain very low at around 0.2% and a number of institutional
shareholders have 'voted with their feet', selling Ricardo shares after losing
confidence in the current Ricardo Board. Ignoring the potential impact from
the lack of share trading liquidity, strategically such a shareholder
concentration can be a positive if the major holders are aligned, but it could
be challenging if there is divergence.

 

Conclusion

 

The benefits to all Ricardo shareholders of Science Group's engagement have
been demonstrated over the past few weeks, through both the partial Ricardo
share price recovery and the increased scrutiny of the Ricardo Board
performance that Science Group has stimulated. Unfortunately the Ricardo Board
remain in denial and seek to blame external factors rather than accept
responsibility.

 

Science Group considers it inconceivable that, after (1) such poor operating
performance, (2) lack of remedial action, (3) ineffective governance and (4)
substantial destruction of shareholder value, that the Ricardo Board can
unanimously self-certify its fitness to continue to run the company without
constraint. It is clear that Ricardo plc needs a catalyst for change and the
position of the Chair is untenable.

 

 

 

- Ends -

 For further information:

 Science Group plc
 Martyn Ratcliffe, Executive Chair                               Tel: +44 (0) 1223 875 200
 Jon Brett, Finance Director                                     www.sciencegroup.com
                                 (https://protect.checkpoint.com/v2/r06/___http:/www.sciencegroup.com___.ZXV3MjpuZXh0MTU6YzpvOjU0ZGI5YzMxZTIyYWRjYjNiNDllZDg0YzAwYjdlYTg0Ojc6ODkyNTpiMmM0ZGYxMGZmNjg5OGUzNTZjZDliYzcxZTZjOWMxY2YxNDJiNjliNzg1Y2E2ZjdiNWUyNWIxMTE3NTdkMjgzOnA6VDpU)

 Canaccord Genuity Limited (Nominated Adviser and Joint Broker)
 Simon Bridges, Andrew Potts                                     Tel: +44 (0) 20 7523 8000
 MHP
 Reg Hoare                                                       Tel: +44 (0) 7831 406117

                                                                 sciencegroup@mhpgroup.com

 

This information is provided by Reach, the non-regulatory press release distribution service of RNS, part of the London Stock Exchange. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
 or visit
www.rns.com (http://www.rns.com/)
.

RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
.   END  NRAEANDEDDXSEFA