Interim results for the six month period ended 30 June 2014
Sagentia Group plc (AIM:SAG) is an international group providing science and technology consultancy services and product development for the consumer, energy, industrial and medical markets.
- Satisfactory operating performance despite significant FX impact
- Strong operating margins maintained due to tight cost control
- Cash balance of £22.8 million at 30 June 2014 (30 June 2013: £20.5 million) and net funds of £13.5 million (30 June 2013: £14.7 million)
Interim results 2014
Sagentia Group plc (including its subsidiaries) is an international group providing science and technology consultancy services and product development for the consumer, energy, industrial and medical markets.
As an international Group with 79% (H1 2013: 82%) of Core Business revenue derived from overseas markets, particularly USA, but a cost base predominantly located in the UK, Sagentia provides an attractive export services model for the UK economy. However, as a result, and as highlighted in the 2013 Annual Report, financial results are correspondingly subject to foreign exchange volatility and with Sterling at a five year high relative to the US dollar, 2014 has been, and will continue to be, affected by this material external factor. While there are a number of other variances from 2013 related to matters previously reported in announcements last year, the effect of currency exchange rates has been most pronounced. In comparing financial performance, in addition to statutory results, the Board has therefore decided to provide clarification regarding the underlying operating performance normalised for these factors.
On a statutory basis, revenue, profit and margin all declined. However, on a normalised basis, adjusted operating profit and operating margins actually increased in the first half of 2014 relative to both the first half and second half of 2013. These factors are explained more fully below and in the Investor Presentation available at www.sagentia.com.
Group financial performance
On a statutory basis, for the six months ended 30 June 2014, the Group (including OTM Consulting) generated adjusted operating profit of £2.4 million (H1 2013: £2.9 million) on revenue of £13.3 million (H1 2013: £14.5 million). Reflecting the increase in non-cash intangibles amortisation and share based payments, profit before tax (‘PBT’) was £1.8 million (H1 2013: £2.7 million). Consultancy fees from Core operations were £11.9 million (H1 2013: £12.3 million) and “Other Core” revenues, which comprise primarily recharged project material revenues and licence income, were £0.8 million (H1 2013: £1.1 million). Other (non-Core) revenues, including property income from sub-let space in the Harston Mill facility, and IT support revenue from M5N during the wind down phase, declined as anticipated. (Throughout this report, adjusted operating profit excludes amortisation of acquisition related intangible assets, share based payment charges and other exceptional items).
Currency exchange movements in the first half of 2014 negatively and significantly impacted revenue, operating profit and PBT. Furthermore, the increasing likelihood of interest rate rises in order to address economic factors within the UK, will only exacerbate the challenge for international businesses by fuelling a further strengthening of Sterling. To quantify the effect of the exchange rate movements, the Board estimates that revenue and profit in the first half of 2014 have been negatively impacted by approximately £0.5 million compared to the first half of 2013 and by approximately £0.3 million relative to the second half of 2013.
To mitigate the currency effects, the Board continues to evaluate the relative merits of currency hedging but to date has concluded that, in the current environment of steadily strengthening Sterling (as opposed to short term volatility), financial hedging instruments would merely defer the effects with little net benefit. However, where possible, the Group is realigning recruitment which will progressively result in more staff being based in the USA, a strategy consistent with the development of the Group’s Technology Advisory services. (The benefits of scale derived from the science and engineering resources being located within the Group’s Cambridge facility outweigh all other factors over the long term).
Normalising for the effects of currency, the wind-down of the non-core M5N business and the one-off licence in the second half of 2013, operating margins of 17.7% in H1 2014 compare to 16.9% in H1 2013 and 14.6% in H2 2013. In this challenging environment, such resilience is very satisfactory but has required a significant tightening of the cost base.
It was highlighted in the 2013 Annual Report and Accounts that the Group’s tax losses anticipated to be used to offset future trading profits were fully recognised as an asset in 2013. As a result, the earnings per share of the Group are not only affected by the foreign exchange and matters noted above, but also by the inclusion of standard rates of corporation tax, although the cash effect remains unchanged due to the significant tax losses carried forward. On a statutory basis, basic earnings per share were 3.7 pence (H1 2013: 7.1 pence), and diluted earnings per share in H1 2014 were 3.4 pence (H1 2013: 6.6 pence).
The Group retains a robust balance sheet with Shareholder Funds at 30 June 2014 of £32.5 million (30 June 2013: £27.7 million), including net cash and freehold property of £27.1 million (30 June 2013: £28.4 million). Cash increased to £22.8 million (30 June 2013: £20.5 million). Net funds at 30 June 2014 were £13.5 million (30 June 2013: £14.7 million).
In summary, while the current foreign exchange environment is challenging, Sagentia Group plc remains highly profitable with a very strong balance sheet.
Geographical and sector revenue
In the period to 30 June 2014, on actual exchange rates in the respective period, the Group’s product and technology development services (‘PTD’) accounted for £10.2 million revenue (H1 2013: £12.4 million) and the Technology Advisory services (including OTM Consulting Ltd acquired in July 2013) accounted for £2.5 million (H1 2013: £1.0 million).
Approximately 45% of the Group’s Core revenue was derived from the Medical Sector in the first half of 2014 (H1 2013: 50%) and 55% from the Commercial Sector (H1 2013: 50%). North America, the Group’s largest international market contributed 62% of Group Core revenue (H1 2013: 69%). The top five clients accounted for approximately 33% and the top ten clients for approximately 49% of the Consultancy fee revenues (H1 2013: 47% and 71% respectively).
In a very challenging currency environment, and with comparison against the exceptionally strong results in 2013, the operating performance of the Group in the first half of 2014 has been satisfactory. However the potential further strengthening of Sterling associated with the anticipated interest rate increases remains a concern. For reference, relative to the exchange rates at the start of the year, the first half results have been negatively impacted by approximately £0.1 million, although if the exchange rate on 30 June 2014 had prevailed through the first half of the year, the first half results would have been negatively impacted by approximately £0.3 million. As such, the Board remains cautious and retains a prudent perspective for the second half although the underlying trading is anticipated to deliver revenue growth in H2 relative to the first half of the year.
Despite the challenges of external factors, the Board considers that the reported operating margin remains towards the top-end of comparable companies in the industry. This strong margin and tight cost control have partially mitigated the effects of the currency market volatility in the first half of 2014 and has enabled the Group to continue its progress.
From this strong foundation and with a robust balance sheet, the Board is committed to managing the business for the long term benefit of shareholders, customers and employees. While prudence and tight cost control will be maintained, and mitigating actions taken as appropriate, the Board will allow the financial performance to fluctuate in order to continue to pursue the Group’s long term strategic objectives. To this endeavour, the Board continues to explore acquisition and investment opportunities that are consistent with the long term strategy of Sagentia Group plc.