REG - Science Group PLC - Q1 Trading Update and Response to Ricardo BSU

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24/04/2025 07:02

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RNS Number : 9426F  Science Group PLC  24 April 2025

 

24 April 2025

 

Science Group plc

(the "Group" or "Science Group")

 

Q1 Trading Update and Response to Ricardo BSU

 

Science Group Q1 Trading Update

 

The volatile stock market conditions in recent weeks have raised concerns for
investors around the world. While it is not Science Group normal practice, in
the current climate it is appropriate to provide an update on trading for the
first quarter of 2025.

 

In summary, Science Group has delivered a positive start to the year, with
revenue and profitability slightly ahead of the Board's plan for the first
quarter. While trading conditions are currently unpredictable, with
considerable variability across different market sectors, the resilient Q1
performance provides a good foundation for 2025.

 

Group operating cash flow was also strong in the first months of the year and
Science Group retains a robust balance sheet with significant cash resources.
In addition, the Group's recently renewed revolving credit facility (£30m +
£10m accordion, expiring in 2030) remains undrawn.

 

Response to Ricardo Business & Strategy Update ("BSU")

 

Science Group is the second largest shareholder in Ricardo plc ("Ricardo"),
with a shareholding of 20.1%. While Ricardo benefits from its long history as
a great British company, the concerns regarding the more recent track record
of Ricardo were set out in the Science Group announcements on 17 March 2025
(www.sciencegroup.com/news-detail/response-to-ricardo-plc-17-03-25
(http://www.sciencegroup.com/news-detail/response-to-ricardo-plc-17-03-25) )
and 31 March 2025 (www.sciencegroup.com/news-detail/update-on-ricardo-plc
(http://www.sciencegroup.com/news-detail/update-on-ricardo-plc) ), including
 :

 

·   Weak profitability despite the 2022 strategic plan defining two key
margin targets, both of which were materially missed (and were recently
cancelled);

·   Inflated reported Underlying Operating Profit ("UOP") resulting from
not allocating shared services costs into the businesses and a liberal use of
"specific adjusting items";

·    Poor cost control, both of central costs and operating productivity;

·    Weak cash conversion, despite repeated assertions that this was a
high priority;

·    Reckless allocation of the capital inflow from the Defense business
disposal, rather than using this capital injection to deleverage and stabilise
the business;

·   Failure of financial and management processes to alert the Board that
operating performance had deteriorated, prior to the E3A acquisition;

·    Ineffective governance which failed to ensure that operating
performance was verified, prior to the E3A acquisition;

·    Excessive executive remuneration for a company with market cap of
c.£150 million.

 

Ricardo released Interim Results, accompanied by a 46-slide presentation, on 5
March 2025. The opening slide of the Interims presentation proclaimed (1)
"clear execution against our  2022  strategy" and (2) "solid profit
improvement performance", ignoring the significant profit downgrade (just 5
weeks prior), the simultaneous cancellation/dilution of the 2022 strategic
margin targets and the enormous destruction of shareholder value over which
the Ricardo Board has presided. While short term volatility is not unusual in
the early phase of a turnaround, 3 years into a 5 year strategic
transformation, shareholders would reasonably anticipate that the strategy and
investments made would be delivering tangible results. Instead, the Ricardo
reality is a share price trading around 15 year lows and well below the level
when the strategy was initiated.

 

Just 3 weeks after release of the Interim Results, Ricardo announced an
unscheduled Business & Strategy Update. When released on 22 April,
accompanied by a further 23-slide presentation, the declaration in the first
line of the BSU presentation that "Q3 trading  is  in line with expectations"
again conveniently ignores the substantial profit downgrade on 30 January
2025. The presentation goes on to portray each business as performing well,
but without acknowledging that analyst forecasts for every business within
Ricardo plc were downgraded during the quarter. Furthermore, given the
substantial destruction of shareholder value and the associated low baseline,
the Ricardo Board's assertion that the company is "well positioned to deliver
significant value creation for Ricardo's shareholders" is analogous to the
arsonist claiming credit for putting out the fire.

 

On the positive side, it is rewarding to see the benefit of Science Group's
engagement, with the Ricardo Board finally acknowledging that the high cost
base and poor productivity are major factors to the root cause of the poor
margins. However, the Ricardo Board fails to recognise that from the bottom
ranking of its peer group (see below), shareholders justifiably expect a more
dynamic and effective programme of remedial action. Unfortunately, Ricardo
(BSU Slide 11) has adopted the limited performance measure of utilisation
rather than the wider and more useful metric of revenue per head which would
capture the productivity/efficiency of the whole organisation, including
direct and indirect staff, which more directly correlates with profitability.
Furthermore, the Ricardo Board's Easter epiphany, that the impact of the
challenging market conditions could indeed be mitigated by more disciplined
cost control, loses credibility when it reports that the Board considered it
necessary to use an "external third party" to address this fundamental
management responsibility. It is hardly reassuring that the Ricardo Board does
not have the confidence in its own management capability to undertake this
exercise internally.

 

It should also be noted that exceptional restructuring charges have been taken
every year by Ricardo for the past 5 years without achieving sustainable
margin improvement. The 2025 BSU continues this well-established Ricardo
custom, which enhances reported "Underlying Operating Profit" ("UOP") through
the exclusion of a wide range of "specific adjusting items". In a consultancy
business, it is common practice (as Science Group does) to align resources
with market dynamics on a regular basis and these are normal operating costs,
not exceptional items. As a result, while the house broker modestly downgraded
UOP forecast by £0.3 million to £20.8 million (a lowly margin of just 5.5%
for FY24/25), the reported EBIT is now forecast to be a loss of £5.1 million
for the current year due to the exceptional/extraordinary costs forecast to
increase to £23.4 million.

 

Cash conversion is also restated as a priority, as has been repeatedly claimed
in the past although Ricardo cash flow has been consistently disappointing. It
should be noted that the timeframe selected (Slide 15 of the BSU presentation)
has been carefully chosen, excluding the poor performance in FY22/23 but
including the anomalous positive result in FY23/24, which unwound in
H1-FY24/25 when cash conversion fell to just 13% from continuing operations
and a negative -4.5% overall. It should also be noted that the strong
assertion in the BSU on forward cash flow incorporates a pre-emptive caveat to
exclude exceptional restructuring charges, contributing to the
cash-generated-by-operations forecast by the house broker for FY24/25 being
downgraded to a miserly £1.0 million, compared to the prior forecast of £7.8
million at 30 January 2025. Cash generation is the most tangible metric of any
business and Ricardo has consistently under-performed.

 

Incomprehensibly the BSU repeats the emotive, defensive rhetoric against
Science Group, although it is hard to see what relevance such baseless
commentary has to a Ricardo strategy update. As previously stated, Science
Group has no concerns regarding the integrity of its acquisition processes and
is proud of its track record in turning around underperforming science,
technology, regulatory and engineering companies. In contrast to Ricardo value
destruction, Science Group has consistently delivered index-beating returns
for shareholders and the comparative tangible operating results (profit and
cash flow) are far more compelling than a diatribe from a Ricardo Board that
has consistently failed its shareholders.

 

In that context, the comparative financial performance is clearly illustrated
by a recent independent financial analyst report (12 March 2025) which
compared a peer group of 13 consultancies. Science Group had the highest
adjusted EBIT margin ("AEM") and ROIC of the companies in the independent
report, in contrast to Ricardo which ranked bottom of the peer group in AEM
and second from bottom on ROIC. Regardless of the excuses, ranking at the
bottom of a large peer group, which have all experienced the same market
challenges, provides an independent and unequivocal benchmark - the Ricardo
performance is derisory.

 

It is also surprising that the impromptu Business & Strategy Update
provides little clarity on the actual future corporate strategy of Ricardo.
The only material strategic development reported appears to be the increased
integration of A&I and Performance Products ("PP"), which is somewhat
contradictory to previous indications regarding the potential sale of PP. The
Ricardo BSU in fact fails to clarify the M&A outlook, which may be a
consequence of Ricardo's high debt leverage and weak balance sheet.

 

In summary, the objective of the Ricardo Business & Strategy Update
remains unclear and appears to have been motivated primarily by Science
Group's shareholding. However, it does demonstrate the Ricardo Board's
rose-tinted perspective, as evidenced on 28 March 2025, when the Chairman
aspired to set out "a clear path to significant value creation", despite
having led Ricardo to a 15 year low share price and a decline of around 50%
since his appointment in November 2022. Ultimately the Ricardo Chairman is
accountable for the destruction of shareholder value, the failure of
governance and the lack of corporate direction. As Ricardo evolves, now is the
appropriate time to align the Board, Management and all Ricardo Shareholders.
It is clear that a change in Board composition is essential to begin to
restore value and shareholder confidence.

 

- 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

 

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