Interim results for the six month period ended 30 June 2019

24 July, 2019

Summary

• Investment in Frontier Smart Technologies Group. Substantial interest of approx 47.6% acquired for £5.9 million

• Operating business performance broadly in line with expectations benefiting from the Group’s range of science and technology service offerings across multiple industry sectors

• Balance sheet and cash position remain strong

• As set out in the Corporate Review undertaken in H2-2018, increased segmental reporting of operations, freehold property and corporate costs to provide greater transparency and facilitate analysis of the component parts of the Group

Enquiries:

Science Group plc

Martyn Ratcliffe, Chairman

Tel: +44 (0) 1223 875 200

Rebecca Archer, Finance Director

www.sciencegroup.com

Panmure Gordon (UK) Limited

Dominic Morley / Alina Vaskina (Corporate Finance)

Erik Anderson (Corporate Broking)

Tel: +44 (0) 20 7886 2500

Note: This announcement contains inside information which is disclosed in accordance with the Market Abuse Regulations.

Interim Results 2019

Science Group is an international, science-led services and product development organisation with a freehold property asset base.

At a corporate level, the first half of 2019 has seen significant developments, with the conclusion of the Corporate Strategic Review (‘Corporate Review’) and the investment in Frontier Smart Technologies Group Limited (‘Frontier’). At 30 June 2019, Frontier is treated as an investment for accounting purposes and the Group reported a profit on this investment based on market valuation. Further shares were subsequently acquired with the Group holding an interest of 47.6% at the date of this report. The Group’s strong cash position enabled this investment in accordance with the Corporate Review.

Operationally, the first half of 2019 benefited from the diversification achieved through the Group’s operating model. The Group delivered a consistent financial performance despite some negative external factors and the successful completion of some large projects in 2018. The Group also realised a net benefit from non-recurring items resulting in a strong reported operating profit.

In summary, for the six months ended 30 June 2019, the Group generated an operating profit of £3.1 million (H1 2018: £2.5 million from continuing operations; £2.7 million total) and an adjusted operating profit of £3.3 million (H1 2018: £3.5 million from continuing operations) on revenue of £23.6 million (H1 2018: £24.7 million from continuing operations; £25.1 million total). The slight year on year revenue decline, compared to the record prior year period, was anticipated. However, revenue was in line with H2 2018 revenue, traditionally the stronger half year. Profit before tax was £2.8 million (H1 2018: £2.3 million from continuing operations; £2.5 million total) benefiting from the net gain on the Frontier investment. (Continuing operations measures exclude the Central Europe operations which the Group exited in H1 2018.) Earnings per share were 6.1 pence (H1 2018: 6.0 pence).

The Group retains a robust balance sheet with gross cash (excluding client registration funds) at 30 June 2019 of £24.0 million (30 June 2018: £18.5 million) and net funds of £7.2 million (30 June 2018: £5.1 million). The long term debt is secured on the freehold properties and was increased in the period by an additional £4.8 million at an effective fixed rate of 4%. The Frontier investment to 30 June 2019 resulted in a cash outflow of £2.8 million offset by £2.2 million arising from the associated issuance of shares out of treasury. Excluding treasury shares, at 30 June 2019, the Company had 41.1 million shares in issue (30 June 2018: 40.0 million) and held 0.9 million (30 June 2018: 2.0 million) of shares in treasury. (Alternative performance measures are provided in order to enhance shareholders’ ability to evaluate and analyse the underlying financial performance of the Group. Refer to Note 1 for detail and explanation of the measures used.)

As set out in the Corporate Review, in future, Group reporting will separate (i) the operating business, (ii) the Group’s freehold property and (iii) the corporate activities and costs. This will provide greater transparency and facilitate shareholder analysis of the component parts of the Group. This is particularly relevant for Science Group due to the significant freehold property asset base. Good progress has been made in this new reporting structure and pro forma information is included in this report.

Operating Business

For the six months ended 30 June 2019, revenue derived from the Group’s operating business was £23.1 million (H1 2018: £24.2 million from continuing operations). The slight decline compared to the strong comparator in the prior year period was anticipated and revenue was in line with the second half of 2018 (H2 2018: £23.0 million) which is traditionally the stronger half year.

The Applied Science and Product Development activities, accounting for 46% of operating business revenue, saw a strong recovery in the Commercial sector compared to both the prior year period and the sequential period, reflecting the management and strategic changes made during 2018. The Medical sector, typically characterised by significant client revenue concentration due to the scale of projects, declined against a very strong comparator in the prior year period, as some larger projects successfully completed in 2018. The revenue profile in the Medical sector is characterised by large projects which inherently create a discontinuity during project transition periods. The Group’s strategic diversification into multiple vertical markets and a range of service offerings mitigates this effect.

Regulatory services account for 36% of operating business revenues. The TSG Europe business is benefiting from the post-acquisition integration programme and reported a good revenue performance in the first half of the year against a tough comparator in H1 2018 and revenue growth relative to the second half of 2018. The decision to cease operations in Central Europe in H1 2018 has enabled the business to focus resources on the larger European markets with partners established in smaller territories. The TSG Americas business had a more challenging period in the first half of 2019 due to the US Federal Government shut-down at the start of the year which significantly impacted the business both during the shut-down itself and in subsequent months. However, this was partially offset by growth in the TSG Americas State-focused renewals operations which benefited from the greater management focus in 2018 and is building a more recurring revenue model. The Leatherhead Food & Beverage regulatory services, which also has a stable recurring revenue profile, delivered a consistent performance in the period and maintains its international market leadership position.

The Science & Technology Consulting, providing advisory services, accounted for 18% of operating business revenue in the period and grew significantly relative to the prior year. The growth was particularly strong in the Food & Beverage sector reflecting the increasing collaboration between the Group’s business activities, a key strategic objective, where the combination of skills is a significant differentiator for the Group.

Overall, the continuing business operations reported an adjusted operating profit of £3.7 million (H1 2018: £3.8 million from continuing operations; £3.9 million total).

Operating profit was £2.9 million (H1 2018: £2.8 million from continuing operations) which benefited from settlement of a claim inherited as part of the TSG Americas acquisition of £0.7 million. (In comparing to prior year, note that H1 2018 included a £0.5 million one-off benefit as reported previously). Following the Corporate Review the operating business is now being charged costs equivalent to market-based rents and ancillary charges for their utilised property space, providing a clear separation of the operating business from the Group’s freehold property assets. (The operating business continues to benefit from the operational flexibility provided by the Group’s ownership of the main properties.)

Freehold Properties

Science Group owns two freehold properties, Harston Mill near Cambridge and Great Burgh in Epsom. The last independent valuation in March 2018 indicated aggregate values of these properties in the range £22.6 million to £33.9 million. The properties are held on the balance sheet on a cost basis at £21.5 million (30 June 2018: £21.6 million).

Great Burgh is owned by a property subsidiary of Science Group plc, which is the preferred structure. For legacy reasons, Harston Mill is currently owned by the trading company, Sagentia Limited, and the Corporate Review concluded that despite the tax payment outflow resulting from moving this asset into a separate subsidiary, the long-term benefits of separation of this property from the operating business justified the transfer. While it was anticipated that this intra-Group transaction would be completed in the current financial year, it has become apparent that due to changes in the UK corporate tax rate, deferring this action until 2020 will save approximately £0.2 million.

For the six months ended 30 June 2019, the rental and associated services income derived from the Group’s freehold properties was £1.7 million (H1 2018: £1.7 million). Income of £0.5 million (H1 2018: £0.5 million) was generated from third-party tenants and £1.2 million (H1 2018: £1.2 million) from the Group’s operating businesses. Intra-group charges are eliminated on consolidation. Property operating profit was £0.5 million (H1 2018: £0.5 million).

The Group’s debt of £16.8 million at 30 June 2019 (£13.4 million at 30 June 2018) is secured against the freehold property assets. The associated interest charge for the 6 month period was £0.3 million (H1 2018: £0.2 million) and for reporting purposes is recognised at Group level within profit before tax.

Corporate

The Corporate Review concluded that corporate overhead costs should be separated from the operating business costs. The corporate function is responsible for Group and PLC matters, together with the strategic development of Science Group. In the period, Corporate costs were £0.9 million (H1 2018: £0.8 million).

The shareholding in Frontier is deemed to be an investment since Science Group had neither significant influence nor control of Frontier at 30 June 2019 and therefore results are not consolidated. At that date, the value of the investment was £3.7 million, having been acquired at a cost of £2.8 million. The profit generated on an accounting basis in the period to 30 June 2019 was therefore £0.9 million, although additional payments of £0.4 million have subsequently become payable to third parties related to the investment. Costs related to the transaction in the period to 30 June 2019 of £0.3 million have been expensed, hence the Board has recognised a net gain of £0.6 million. As part of this activity, Science Group issued 1.1 million shares from Treasury. Net of the gain on the Frontier investment, Corporate costs were £0.3 million (H1 2018: £0.8 million).

Other accounting matters

The share based payment charge in the period increased to £0.5 million (H1 2018: £0.2 million) reflecting the full period cost of the Enhanced Executive Incentive scheme grants in May 2018 and the increase in the number of PSP shares granted to employees in 2018.

The Group has adopted IFRS 16 Leases from 1 January 2019. The effect of IFRS 16 has been to recognise a right of use asset on the Consolidated Balance Sheet with a corresponding lease liability. An additional depreciation charge of £0.4 million has been recognised in the period with a £0.4 million reduction in operating lease costs and an incremental interest charge of £51,000.

Investment in Frontier

Frontier is a pioneer in technologies for Digital Radio and Smart IoT Devices, located in Cambridge, London, Hong Kong, Shenzhen and Timisoara (Romania). The AIM-listed Group company is incorporated in the Cayman Islands and therefore is not within the jurisdiction of the UK City Code on Takeovers and Mergers.

Frontier issued a trading update on 9 May 2019, which forecast revenue for the year to 31 December 2019 of $36.6 million and a Trading EBITDA loss of no worse than $1.5 million.

During May and June, Science Group acquired a shareholding in Frontier of 11,510,521 ordinary shares representing approximately 28.3% of the voting share capital of Frontier. The average price of the shares acquired was 24 pence per share and the aggregate cost was £2.8 million. Subsequent to the period end, on 1 July 2019, the Group declared its intention to make a formal offer for Frontier at 35 pence per share and duly made the offer to Frontier shareholders on 2 July. In parallel to the offer, the Board pursued an active share buying programme in the market. At the offer closing date of 16 July 2019, Science Group had an interest in 40.8% of Frontier and extended the offer until 19 July 2019, at which time Science Group’s aggregate interest of share purchases and offer acceptances had increased to 19,447,431 shares, equivalent to 47.6% of the voting share capital of Frontier. A total cost of £5.9 million has been incurred to date in acquiring the shares.

The future strategy is anticipated to continue to reflect the underlying model of Frontier to maintain its market leadership position in Digital Radio, whilst exploring opportunities for the Smart Audio/IoT (Internet of Things) business as this global technological transformation evolves.

Following the investment, Science Group is considering the most appropriate model for enabling this strategy. There are a number of potential alternatives which are being considered. A statutory merger is one mechanism, which if executed would convert the investment into an acquisition and Science Group is exploring this approach, although at this stage it is not anticipated that such an action will be undertaken in the near-term. The Board remains excited by the Frontier business, its employees and the potential opportunities which may or may not include collaboration with existing parts of Science Group.

Summary

In summary, the performance of the Group’s operating business in the first half of 2019 has been broadly in line with the Board’s expectations. The results reflect the strong recovery in product development in the Commercial sector and continued progress in the Group’s Consulting services offset by the characteristics of the Medical sector, with its concentrated revenue profile, and the external factors impacting the TSG Americas activities. The Group’s breadth of market sectors and service offerings again provides resilience and stability in the face of market and macroeconomic uncertainty. The Board retains its focus on financial and commercial discipline.

The investment in Frontier is consistent with the conclusions of the Corporate Review undertaken in the second half of last year. The strong balance sheet gives flexibility to invest in opportunities as they arise and supports the Board’s continued shareholder alignment and value-creating priority.

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