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RNS Number : 9383G  Science Group PLC  01 May 2025

 

1 May 2025

Science Group plc

(the "Group" or "Science Group")

 

Ricardo Investment Update and General Meeting Requisition

 

Background

 

Science Group announced its initial investment in Ricardo plc ("Ricardo") on
28 February 2025 and is now the second largest shareholder in the company with
a holding of 20.08%. On 10 March 2025, following the Ricardo Interim Results
announcement, Science Group highlighted the need for a review of the Ricardo
strategy in order to recover value for all Ricardo shareholders. (Further
background is set out in Science Group statements on 17 March, 31 March and 24
April 2025.)

 

Ricardo announced its Business & Strategy Update ("BSU") on 28 March and
released it on 22 April 2025. Contrary to the expectation for such an
unscheduled event shortly after the Interim Results (which warranted
shareholder notification 4 weeks in advance), the BSU was in fact merely a
repetition of the existing strategy with another well-camouflaged FY24/25
forecast downgrade. While the BSU proclaimed to provide reassurance in
relation to the current financial year, the house broker actually reduced
FY24/25 forecast for Underlying Operating Profit and the previous forecast
reported EBIT (£18.6m at end of January and £2.2m at 10 March) is now
forecast to be a loss of £5.1m. Cash generated by operations for FY24/25 is
forecast to reduce from £7.8m at end January and £6.1m at 10 March to just
£1.0m now. As disclosed, there is now forecast to be minimal bank covenant
headroom (interest cover) at 30 June 2025, a situation which was totally
avoidable if the cash inflow from the Defense disposal had been retained to
stabilise the business.

 

The fact is that three years into the 5-year 2022 strategic plan, Ricardo is
in a far worse financial position today than when the 2022 plan was initiated.
The table below compares the results reported in FY21/22 with the house broker
forecast for FY24/25. While revenue from continuing operations is broadly
flat, every other key financial metric has deteriorated significantly.

 

 Ricardo plc                                               FY21/22                    FY24/25                                        Variance

 Continuing Operations (unless stated as Reported below)   (Source : Annual Report)   (Latest House Broker Forecast)

 Revenue                                                   £380m                      £375m                                          -1%
 Underlying Operating Profit                               £28.0m                     £20.8m                                         -26%
 UOP Margin                                                7.4%                       5.5%
 Underlying PBT                                            £24.2m                     £12.6m                                         -48%
 Underlying Basic EPS                                      31.2p                      14.2p                                          -54%
 Reported EBIT                                             £16.2m                     -£5.1m
 Reported Net Debt                                         £35.4m                     £61.1m

                                                                                      (forecast to increase to £84m in June 2026)

 

As set out in the Science Group announcement on 17 March 2025, Ricardo has
also failed to deliver on virtually all the strategic financial targets that
the Ricardo Board set itself in 2022 and the key profitability targets of
doubling underlying operating profit ("UOP") and mid-teens UOP margins were
dropped in March 2025. The execution of the 2022 strategy has maintained
revenue but substantially increased net debt and reduced Ricardo
profitability. Ricardo has sought to blame external market conditions, yet an
independent analyst report (12 March 2025) placed Ricardo at the bottom of a
peer group (all of which will have been exposed to similar market conditions)
for Adjusted EBIT Margin and second from bottom ranking on ROIC. (As
reference, Science Group ranked highest on both Adjusted EBIT Margin and ROIC
of the peer group.)

 

Furthermore, there was nothing in the April BSU to restore shareholder
confidence in future years and in regard to the Ricardo strategy, the BSU was
even more disappointing in simply recycling the history of the portfolio
changes. Quite incredibly, the Ricardo BSU RNS allocated far more words trying
to criticise Science Group (Ricardo's second largest shareholder) than
articulating the company's strategy ("Portfolio Transformation").

 

In summary, the Ricardo Board has failed its shareholders. Despite the
destruction of shareholder value, the Ricardo BSU was little more than a
self-serving promotion to try to maintain the status quo. It portrayed a
misleading perspective of the success of the Ricardo 2022 strategy and missed
the opportunity to engage with shareholders to realign the company priorities.
As a result, the lack of direction/leadership at Ricardo has been further
exposed by the BSU and the need for change in the Ricardo Board in order to
restore confidence and ultimately shareholder value to all Ricardo
shareholders, is readily apparent.

 

Ricardo Shareholder Base

 

The Ricardo shareholder base has evolved significantly since the major profit
downgrade on 30 January 2025. Recent analysis undertaken on behalf of Science
Group indicates that the top 4 shareholders now account for over 65% of the
issued share capital. The top 6 holders account for over 70% and 13
identifiable beneficiary shareholders reach c.80%. (The Ricardo directors in
aggregate hold just c.0.2%.)

 

As highlighted on 31 March 2025, such a concentrated shareholder base can be a
positive or negative depending on the alignment of the holders. Science Group
has engaged in dialogue with Ricardo's major shareholders, where possible.
While the dissatisfaction with the performance of Ricardo is consistent, it is
apparent that there are a range of legitimate opinions on how best to recover
value for all Ricardo shareholders.

 

Ricardo - Strategic Options

 

Despite the Ricardo Board taking 4 weeks to issue the Business & Strategy
Update, the underwhelming output and lack of leadership naturally leads
Ricardo shareholders to consider the strategic options for the company. In
addition to persisting with the current Ricardo programme which has blatantly
failed to deliver value to shareholders, there are several alternatives but it
is important to highlight the context in which Ricardo now operates with (1)
very weak cash flow; (2) limited headroom on the interest cover bank covenant
(Slide 17 of BSU presentation); (3) the further forecast downgrade by
Ricardo's house broker following the BSU; (4) net debt position forecast to be
£61m at June 2025, rising to £84m at June 2026; and (5) the bank facility
renegotiation/extension required in the coming months. Shareholders should
therefore consider the possibility that an equity fund raise may be required,
potentially even prior to the release of the FY24/25 results anticipated in
September 2025.

 

1.    Ricardo Turnaround

 

Science Group believes that value for all Ricardo shareholders will be best
realised through addressing the operating under-performance and associated
issues set out by Science Group in prior statements. Science Group believes
that 'fixing the patient' needs to start at the top of the organisation, with
the leadership of the Ricardo Board. Accordingly, Science Group has submitted
a letter to the Ricardo Board requisitioning a general meeting of members to
replace the Chairman of Ricardo plc. (See below.)

 

Executing an operational turnaround, and Ricardo shareholders should be in no
doubt that the business requires remedial action to address the persistent
poor operating performance (profitability and cash flow, with a weak balance
sheet), will take time. But in the currently poor market conditions for
business disposals, using the time constructively to fix the underlying
operations provides the best opportunity for Ricardo shareholders to recover
value.

 

Science Group management has considerable experience in turnaround situations
of technology and engineering companies and believes Ricardo should be
structured as three independent operating divisions : E&E, Rail and
A&I (including Performance Products). The cost base (direct, indirect and
PLC costs) needs to be realigned and productivity (revenue per head) improved.
While such a process would need to reverse some of the organisation
centralisation of recent years, independent business units will reduce the
excessive overhead and provide future strategic optionality when market
conditions are more appropriate.

 

2.    Sale of Ricardo

 

Following the substantial value destruction experienced by Ricardo
shareholders, it is understandable that more immediate value realisation may
be a priority for some holders. It is not unreasonable therefore for
alternative corporate strategic options to be actively explored and there are
two particular scenarios that have been proposed : A sale process for the
whole of Ricardo or a 'Break-Up' model.

 

In recent weeks, Science Group has received unsolicited direct and indirect
contacts from a number of private equity organisations about  Ricardo. These
have been very preliminary enquiries, merely seeking an understanding of
Science Group's position as a major Ricardo shareholder. Science Group has
assured all enquirers that Science Group would consider any interest in
Ricardo that was in the best interests of all Ricardo shareholders.

 

However, reserving all options and rights, it is important to clarify that
while  Science Group would support an immediate sale process seeking offers
for the whole of the Ricardo Group, shareholders should not presume that
Science Group would participate as a potential acquiror in any such sale
process since the risks are high due to the reasons set out previously (poor
performance, forecast downgrades, process failures, ineffective governance,
etc). Furthermore, while a full equity sale may be acceptable to Science
Group, in view of recent Ricardo history and the lack of confidence in an
imminent recovery the valuation achievable may be unattractive.

 

3.    Break-Up Model

 

The alternative model that has been suggested by various parties since the
profit warning in January, is to realise value through a break-up of Ricardo.
A 'Break-Up' model is very different to a selective disposal of a non-core
business - the objective of the Break-Up is to liquidate the Group whereas the
latter is an integral part of a larger strategy which is intended to leave a
healthy core operating business.

 

While Sum-of-the-Parts spreadsheet models can often make a Break-Up Model look
appealing, they can be notoriously self-deluding with the theoretical
shareholder value heavily eroded by the costs associated with execution.
Typically, the most attractive business receives the early interest and the
final retained business valuation suffers due to the accumulated liability
risks associated with the prior transactions. Furthermore, the valuation
realised is dependent on the preparatory work to facilitate such a process,
and the actions set out in (1 - 'Ricardo Turnaround') above would be required
before an effective Break-Up strategy could be seriously undertaken or at
least one that would realise good value for Ricardo shareholders.

 

In that regard, and in relation to Ricardo specifically, further
considerations include:

 

·    The absence of an update in the BSU on the potential disposal of the
Performance Products ("PP") Division is notable, not least because every
analyst report since July 2024 from one of the house brokers has referenced
it, with the exception of the 22 April 2025 note. Indeed, the Auto/Industrial
strategy appears to have been completely reversed with greater integration of
A&I and PP, presumably because the PP disposal has not been successful.

·    While a transaction to sell an industrial-focused business may be
understandably challenging at present, in the current geo-political and
economic climate, sentiment for Rail and Energy Transition/Environment
businesses is also unlikely to be conducive to realising attractive valuations
in the near term.

·    The Ricardo practice of inflating reported Divisional profitability
by not allocating shared services costs to the business and the liberal use of
"specific adjusting items" (including "restructuring charges" every year for
at least the past 5 years) will not delude credible buyers who will value the
business on the real underlying, sustainable margins of the operating
business.

·    The Ricardo organisational strategy in recent years has been to
centralise shared services/support functions which would need to be unwound to
decentralise resources to facilitate a disposal process.

·    Down-scaling Ricardo will severely impact the retained business'
profitability, as evidenced after the Defense disposal. Ricardo has a high
fixed cost base and successful down-scaling needs the overhead to be reduced
at a rate faster than the lost contribution. Unfortunately Ricardo track
record of overhead cost control is poor.

·    The DB Pension Scheme will need to be resolved and such processes
take time. The  Board of Trustees of the Ricardo Group Pension Fund would
need to be satisfied that their members interests are addressed and while a
buy-out may be feasible, it is understood that the DB pension buy-out market
is an active environment at present.

 

In summary, while the Break-Up Model provides a facade of activity, the time
and cost of such a complex process should not be under-estimated. The
temptation to consider the Ricardo Defense disposal as a reference would be
misleading since it was the most independent operation in Ricardo with a
limited geographic spread, making separating that business relatively straight
forward. Indeed, in order to dispose of any major Ricardo business today the
work to make each business a stand-alone operation is fundamental to realising
good value for Ricardo shareholders. Therefore, at the present time, Science
Group believes the "Break-Up" strategy is probably the worst of all near-term
options in terms of actually realising cash value for Ricardo shareholders,
even if transactions could get completed. However, the actions set out at (1 -
'Ricardo Turnaround') above would enable future disposals to be considered in
due course if appropriate.

 

Conclusion

 

Science Group is a science, technology & engineering consultancy and
systems company, a very similar business to Ricardo. However, in stark
contrast to Ricardo, Science Group has a track record of delivering
index-beating shareholder returns. With its operating management experience,
Science Group has set out its concerns regarding the poor operating
performance and ineffective governance of Ricardo. Indeed, it is this very
destruction of value by the Ricardo Board that enabled Science Group to
acquire its shareholding at around 15 year low share price levels.

 

Science Group is not a fund manager, and a long-term passive holding is not
Science Group's model. While the Board has a broad shareholder remit and the
low buy-in price of the Ricardo investment provides Science Group with
considerable optionality, investments are made to deploy capital with added
value from the relevant resources and expertise available within the Group.
The analysis and scrutiny by Science Group over the past 2 months has already
benefitted all Ricardo shareholders and there is potential for far greater
engagement and collaboration between Science Group and Ricardo.

 

For the avoidance of any doubt, Science Group's strategic investment can
enable its capabilities and expertise to be deployed to the benefit of all
Ricardo shareholders. Science Group strategy does not require full ownership
and the 20% shareholding in Ricardo satisfies the strategic investment
threshold.

 

It is readily apparent and totally understandable that Ricardo shareholders
are disappointed with the company's performance.  However, it is also likely
that there are differing legitimate views within the concentrated Ricardo
shareholder base on the route to value recovery. Whilst Science Group would
support a formal sale process of Ricardo plc, it is uncertain if a valuation
attractive to shareholders could be realised in the current climate and with
Ricardo's recent performance. The alternative 'Break-Up' model is complex and
is unlikely to deliver the theoretical value in a timely manner to
shareholders that analyst spreadsheets can imply since considerable
restructuring and preparatory work would be necessary - it is not the panacea.
Therefore, Science Group believes that shareholder value is best realised by
undertaking the hard work of turning around the businesses and structuring
Ricardo in three independent operating divisions. Ultimately, this would
provide future strategic optionality when market conditions are more suitable
should a disposal become appropriate.

 

In conclusion, the Ricardo Board has failed to provide the necessary
leadership, yet if Ricardo shareholders are not aligned on the corporate
direction, there is a risk that the Ricardo Board becomes even more
ineffectual. Therefore, Science Group has been left with no alternative but to
requisition a general meeting to determine whether Ricardo shareholders have
confidence, or not, in the leadership of the Ricardo Board. Science Group, as
the second largest Ricardo shareholder, does not have confidence and believes
it is in all Ricardo shareholders' interests to make the necessary change at
the present time.

 

 

General Meeting Requisition

 

Science Group yesterday sent a letter to the Ricardo Board requisitioning the
directors of Ricardo to call a general meeting of the members of Ricardo
("General Meeting") within 21 days of the letter and such meeting to be held
within 28 days of the notice calling the General Meeting.

 

The requisition notice proposes a single resolution: To remove Mr Mark Clare,
Chair of the Board, as director and Chair. In effect, the General Meeting
requisition is a Vote of No-Confidence in the leadership of the Ricardo Board.

 

Mr Clare was appointed to the Ricardo Board on 17 November 2022. On that date
the Ricardo share price was 430 pence, compared to the Ricardo share price on
30 April 2025 of 246 pence, recovering from a low of 213 pence in February.
Ricardo is now in a significantly worse financial position than when Mr Clare
was appointed, with a weak balance sheet (forecast to deteriorate further) and
little headroom on a key bank covenant. The Chair is ultimately accountable
for the poor performance and ineffective governance that has resulted in the
destruction of value and the uncertain financial position of Ricardo plc.

 

If the resolution is approved at the General Meeting, the constitution of the
Ricardo Board should then be reviewed in consultation with shareholders. The
Ricardo concentrated shareholder base facilitates such an approach.

 

 

- 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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