Audited results for the year ended 31 December 2014
Sagentia Group plc (‘Sagentia’ or the ‘Group’ or the ‘Company’) reports its audited results for the year ended 31 December 2014.
- Satisfactory operating performance in volatile currency environment
- Core consultancy fees in line with prior year at £25.7 million (2013: £25.8 million)
- Group revenue of £28.3 million (2013: £30.6 million) reflecting currency impact of £0.8 million and revenue reductions in non-core activities including M5N
- Adjusted* operating profit of £5.4 million (2013: £5.7 million) primarily due to currency impact of £0.7 million
- Acquisition of Oakland Innovation Limited in February 2015
- Proposed significant dividend increase to 4.0 pence per share (2013: 1.1 pence)
- Proposed share buy-back and liquidity programme
Sagentia Group plc reports another satisfactory operating performance for the year ended 31 December 2014, particularly in the context of the volatile currency environment throughout the year. While comparisons to 2013 require adjustments to reflect a number of one-off events in the prior year, in summary, the first half of 2014 was challenging while the second half of the year returned to growth in the core consultancy business. Operating margins were exceptionally strong and the balance sheet remains very robust.
Business Summary and Operational Review
Sagentia Group plc provides outsourced science, product and technology development consultancy services to a wide range of markets. The majority of the Group’s revenues are derived from projects operated on behalf of clients on a time and materials basis, although some smaller projects, providing technology advisory services, are undertaken on a fixed price model. The Group’s operations are based primarily at the Group’s freehold campus property in Harston, near Cambridge, with additional UK offices in London and Guildford, and US offices in Boston, Massachusetts, and Houston, Texas.
The Core Business segment of the Sagentia Group comprises two divisions, further information on which is available at www.sagentia.com:
- The Product & Technology Development division represents the majority of the business and is focussed on science, product and technology development.
- The Technology Advisory division provides technology advisory services to a number of market sectors. The division incorporates the OTM business acquired in 2013 and the newly acquired Oakland Innovation Limited.
For the year ended 31 December 2014, Group revenue was £28.3 million (2013: £30.6 million) although Core Consultancy Fees were in line with the prior year at £25.7 million (2013: £25.8 million). Adjusted operating profit of £5.4 million (2013: £5.7 million) reflected the strong adjusted operating margin of 19.1% (2013: 18.8%). The results in 2014 were negatively affected by the volatile currency environment with the average USD Sterling rate of 1.65 being materially higher than 2013 (1.56), an impact of £0.8 million in terms of revenue and £0.7 million in terms of profit. In addition, 2013 benefitted from an exceptionally strong first half of the year; a one-off licence of £0.4 million; and the Manage5Nines IT services business which has now been discontinued, while 2014 benefitted from a full year of the acquisition of OTM Consulting, acquired in July 2013. (Further detail is provided in the Finance Director’s Report. An investor presentation is also available at www.sagentia.com which includes a bridge between the 2013 and 2014 results.)
Revenue from the Group’s Commercial customers accounted for 57% of Core Business revenue with the Medical customer base accounting for 43% (2013: 54% and 46% respectively.) The Group continues to have a high proportion (78%) of its consultancy revenue derived from international markets (2013: 82%), particularly North America which accounted for 61% (2013: 67%).
Cash balance at 31 December 2014 was £23.8 million (2013: £22.4 million) with net funds of £15.0 million (2013: £12.6 million), after cash outflow associated with share buy backs of £1.8 million. The Group’s debt of £8.8 million at 31 December 2014 is secured only on the freehold property in Harston which has a current balance sheet carrying value of £13.6 million.
At the end of 2013, the Board decided to wind down the Group’s outsourced IT services business, Manage5Nines Limited. This business was a minor non-core legacy activity in an increasingly challenging market. In 2013, Manage5Nines contributed revenue of £1.1 million to the Group. This business was successfully wound down during the first half of the year, contributing revenue of £0.2 million.
On 18 February 2015, Sagentia acquired Oakland Innovation Limited (’Oakland’) for a consideration of £5.0 million. Oakland is a Cambridge-based R&D consultancy specialising in technology innovation and market intelligence for the global consumer and healthcare markets. The business will become part of the Group’s Technology Advisory business and will be relocated to the Group’s facility in Harston.
Dividend and Share Liquidity
While the Board has evaluated a number of other potential acquisition opportunities of varying scale during the past year, in the absence of a major acquisition, the Board has reviewed the cash requirements of the business particularly in the context of the strong operational cash generation. As announced on 23 January 2015, the Board has considered a return of cash to shareholders and through the Company’s broker consulted with a number of Sagentia’s major shareholders regarding the appetite for participation in a tender offer. As a result, it is apparent that there would be limited take-up of a tender offer at a level that the Board could recommend, based on the share price over the six months prior to the announcement, and the Board has therefore given further consideration to balancing cash retention for investment in the future growth of the Company and returns to Shareholders.
Through this process, the Board has reviewed the Company’s dividend policy and in view of the strong cash generation of Sagentia, together with the exceptional asset base of the Group, the Board are proposing to substantially increase the dividend to 4.0 pence per share (2013: 1.1 pence), at a total cost of £1.5 million (2013: £0.4 million) based on the number of shares in issue at 28 February 2015. Such a yield, equivalent to approximately 3% (based on the Company’s recent share price), should further enhance the investment returns for all Sagentia Shareholders. The Board will retain its policy of a single dividend per annum and in the event of a major acquisition will review the dividend policy. Subject to shareholder approval, the dividend will be payable on 12 June 2015 to shareholders on the register at the close of business on 22 May 2015.
The Board believes that maintaining an institutional shareholder base is fundamental to the purpose of being quoted on the AIM market. Unfortunately, the lack of share liquidity is a challenge for many small cap listed companies and can be a deterrent to institutional investors. While broker market makers can provide some liquidity, it is unrealistic to expect them to balance relatively significant amounts of shares over extended periods. The consequence of this market imperfection is that many institutional investors are reluctant to invest in illiquid small cap shares, such as Sagentia, yet one of the primary reasons for a company being listed is to access capital when appropriate and placing shares with institutional investors is by far the most practical, cost-effective method of raising capital for a small cap company. Retaining an institutional investor base is therefore considered by the Board to be beneficial to Shareholders, the Company, its employees and its customers.
Therefore, as in previous years, the Board will seek approval from Shareholders at the Annual General Meeting (‘AGM’) for authority to acquire up to 10% of the issued share capital of the Company so that, if deemed appropriate and in the best interests of Shareholders, the Company may undertake share purchases in the coming year. In addition, the Board will seek Shareholder approval for an extension to this authority to acquire up to an incremental 10% of the issued share capital of the Company, subject to the aggregate cost of the share buy-back under both authorities being capped at £10 million. Due to the shareholding of the Chairman (32.6% at 28 February 2015), these authorities will, as in previous years, be conditional on the passing of a general authority Panel Waiver by shareholders and on Takeover Panel approval of a waiver of Rule 9 of the UK Code on Takeovers and Mergers.
While buy-back programmes can address short term sell-side liquidity, there is a reciprocal challenge for institutional investors in sourcing shares in small cap companies, where a relevant holding within a typical fund portfolio may require a shareholding in a company such as Sagentia of around 5%. Unfortunately share buy-back programmes reduce supply liquidity exacerbating the market liquidity challenge in the medium term. Therefore, the Board has determined to consider providing supply liquidity through sale of the treasury shares acquired through the buy-back programme. This will require approval of the standard resolution regarding pre-emption rights at the AGM, limited to 10% of the issued equity at the time of the AGM notice. This authority is generally used to facilitate small fund raisings but could be equally applicable to facilitate supply-side liquidity and, subject to such action being considered to be in the best interests of Shareholders, the Board will consider using this authority for resale of treasury shares subject to the following:
- The Company’s Broker having made reasonable endeavours to source supply in the open market;
- Minimum volume of 1.0 million shares;
- The buyer having been identified to the Company; having long term investment intentions; and not holding more than 10% (directly or in association with any other holder) of the issued share capital after the transaction; and
- The price of the Treasury Shares sold being at prevailing market prices at the time.
The Board believe that this share liquidity programme, addressing both buy-side and sell-side liquidity, offers a potentially attractive mitigation to institutional investor concerns regarding small cap investments. It must be emphasised that the Board will only undertake these actions when they reasonably consider that the transaction will be in the best interests of Shareholders and the Company will not be in breach of the Financial Services and Markets Act 2000 and other related regulations.
In summary, 2014 had a more challenging start than the prior year which, as previously reported, had been exceptionally strong. This was made more difficult by a rapidly deteriorating foreign exchange environment in the first half. However the second half of the year saw a return to organic growth in the core consultancy business, despite the negative currency impact. Through tight cost control, operating margins were above the Board’s target and a satisfactory overall result for the year was achieved.
The integration of OTM Consulting, acquired in mid-2013, has been successful and the integration of Oakland is now in progress. The Board continues to evaluate corporate opportunities to accelerate the growth of Sagentia, although there can be no certainty that any transaction(s) will occur.
In the absence of a major acquisition, the Board has considered how best to deliver value for Shareholders and is proposing specific measures, namely a very attractive dividend, increased share buy-back programme and supply side liquidity. Shareholders will have the opportunity to vote on these proposals at the Annual General Meeting, scheduled for 21 May 2015.
Martyn Ratcliffe, Chairman
Finance Director's Report
In the year ended 31 December 2014, the Group generated revenue of £28.3 million (2013: £30.6 million). Adjusted operating profit was £5.4 million (2013: £5.7 million), reflecting the tight cost control and high adjusted operating margin of 19.1% (2013: 18.8%). Reported operating profit was £4.7 million (2013: £5.4 million) and profit before tax was £4.2 million (2013: £4.9 million). (Adjusted operating profit and/or margin excludes amortisation and impairment of intangible assets and share based payment charges.)
A significant proportion of the Group’s revenue is denominated in US Dollars and Euros and changes in exchange rates can have a significant influence on the financial performance. In 2014, £14.1 million of the Group revenue was denominated in US Dollars at an average exchange rate of 1.65 (2013: £13.9 million at 1.56). On a constant currency basis, if the 2013 GBP/USD exchange rate had prevailed throughout 2014, revenue and operating profit would have been £0.8 million higher and £0.7 million higher respectively.
At 31 December 2014, Sagentia had £17.6 million (2013: £20.9 million) of tax losses carried forward of which £9.3 million (2013: £12.6 million) relate to trading losses which are anticipated to be used to offset future trading profits. At 31 December 2013, all of these carried forward trading tax losses were recognised as a deferred tax asset in the balance sheet. This asset reduces as the tax losses are utilised, but the reported corporation tax charge on trading profits for the year ended 31 December 2014 cannot therefore be offset by newly recognised carried forward losses. Therefore, for the year ended 31 December 2014, the tax charge reported in the statutory accounts more closely reflects the nominal corporation tax rate with a corresponding effect on reported profit after tax and earnings per share.
The unrecognised tax losses of £8.3 million (2013: £8.3 million) include £2.3 million (2013: £2.3 million) of trading losses in Sagentia Inc and £4.3 million (2013: £4.3 million) of tax losses derived from excess management expenses in a subsidiary used for legacy investments (which have previously been fully impaired). This company had net liabilities of £8.2 million at 31 December 2014 (2013: £8.2 million) and the excess management expenses can solely be utilised by this company against its future trading profits. The Group will only recognise these tax losses when it becomes probable that the tax losses can be utilised and only an insignificant amount of revenue was recognised in this subsidiary in the year ended 31 December 2014.
The accounting treatment of the tax losses has a significant effect on earnings per share and therefore, based on the average number of shares in issue during the year, adjusted basic earnings per share (‘EPS’) from continuing operations decreased to 10.6 pence (2013: 13.4 pence) and adjusted diluted EPS from continuing operations decreased to 9.6 pence (2013: 12.2 pence). This reduction is in line with the increase in the Company’s corporation tax charge moving closer to the corporation tax rate for 2014 albeit that the cash outflow related to tax is anticipated to be significantly below the reported tax cost. The Board anticipate that, in view of the trading tax losses carried forward, if the Group’s profit profile remains similar to 2014, the Group’s cash outflow related to tax will continue to be modest for the next two years, after which the tax cash flow will increase.
The Group reports its results under two business segments. The ‘Core Business’ represents all revenues derived from consultancy fees (excluding IT services) and project expenses recharged on consultancy projects, together with revenues from product sales and licence income. The ‘Other’ segment comprises fees and recharged project expenses derived from outsourced IT services (Manage5Nines Limited, a wholly owned subsidiary which was wound down during 2014) and property income.
Revenue from Core Business activities was £27.2 million (2013: £28.3 million) and Consultancy fees, which exclude recharged material revenues, product and licence income and other non-Core revenues, remained in line with 2013 at £25.7 million (2013: £25.8 million), of which £4.5 million (2013: £2.4 million) was derived from acquisitions made in 2013. Revenue from Core Business operations includes materials used in projects recharged to customers of £1.4 million (2013: £2.1 million), and product and licence revenue of £0.1 million (2013: £0.5 million, including a one-off licence of £0.4 million).
Other revenue includes property income from space let in the Harston Mill facility of £1.0 million (2013: £1.2 million), reflecting the increased space utilised by Sagentia. The Harston Mill property currently has a total of 9 tenants (2013: 8 tenants). Approximately 5,300 square feet (2013: 7,400), or 17% of the total lettable area was available at the beginning of 2015. Other revenue also includes IT Support (including materials) through Manage5Nines Limited totalling £0.2 million (2013: £1.1 million).
In September 2013, the Group entered into a new £10.0 million term loan with Lloyds TSB Bank plc (‘Lloyds’) for a term of five years with £5.0 million amortising and the remaining £5.0 million repayable at term. This loan is secured solely on the freehold property at Harston and subject to maintaining cash balances in excess of £2.0 million, the loan is not subject to operating covenants. The Group has also entered into a five year interest rate swap, the effect of which is to fix the interest rate on the new loan at approximately 3.9%. The Group adopted hedge accounting in the prior year under IFRS 9, Financial Instruments however ceased to hedge account for the interest rate swap during the current financial year. The change in fair value of the interest rate swap from inception to balance sheet date of £203,000 was recognised in the Consolidated Income Statement in the year ended 31 December 2014 (2013: the change in fair value of £41,000 was recognised in reserves).
The Group has a strong balance sheet with Shareholders’ Funds at 31 December 2014 of £33.4 million, equivalent to 89.6 pence per share (2013: Shareholders’ Funds of £31.1 million equivalent to 80.6 pence per share) including the Group’s freehold property in Harston. The freehold property at Harston was independently valued in July 2010 and August 2013 related to the associated bank loan. Under the assumptions used, including tenant covenant strength and market rents, the latest indicative valuation range for the building was between £12.9 million and £18.0 million. The Board has not adjusted the carrying value of the property on the balance sheet since 2010 which at 31 December 2014 was £13.6 million.
The gross cash position at 31 December 2014 was £23.8 million, (2013: £22.4 million) and net funds were £15.0 million (2013: £12.6 million), after cash outflow of £1.8 million related to the share buy-back programme. Net cash generated from operating activities was £4.9 million (2013: £3.9 million). Debtor days were 50 days (2013: 48 days) and combined debtor and WIP days were 12 (2013: 21).
Rebecca Hemsted, Finance Director