Interim results for the six month period ended 30 June 2020
- Strong performance, ahead of the Board’s expectations, against the background of the Covid-19 pandemic
- Group revenue growth of 56% to £36.9m (H1 2019: £23.6m), including first full half-year from Frontier Smart Technologies and organic services growth of 13%
- Adjusted operating profit increased by 50% to £4.9m (H1 2019: £3.3m)
- Successful post-acquisition restructuring and turnaround of Frontier Smart Technologies
- Group organisation evolving to maximise business synergies and scale operations
- Balance sheet and cash position remain strong providing opportunity for further corporate activity
Interim results 2020
Science Group is an international, science-led services and product development organisation with a significant freehold property asset base. Following the Frontier acquisition in 2019 and an organisation restructuring, the Group now comprises three operating divisions: R&D Consultancy; Regulatory & Compliance; and Frontier Smart Technologies.
The Group achieved record results in H1 2020, whilst also successfully managing the challenges related to the Covid-19 pandemic. For the six months ended 30 June 2020, the Group adjusted operating profit increased by 50% to £4.9 million (H1 2019: £3.3 million) on Group revenue of £36.9 million (H1 2019: £23.6 million). The 56% revenue growth included organic services revenue growth of 13% (excluding materials). Adjusted profit before tax was £4.6 million (H1 2019: £2.9 million) and adjusted basic earnings per share were 8.8 pence (H1 2019: 5.9 pence).
The first half of 2020 has benefitted from the Group’s sector diversification and the greater scale resulting from the 2019 acquisition of Frontier, together with some unanticipated cost savings (for example delayed recruitment of new hires and significantly reduced travel) due to the pandemic. Within the services operating divisions, a combination of home-working and office/lab presence enabled the continuation of client projects. The very strong performance during this unprecedented event is a credit to the employees of Science Group.
The Group retains a robust balance sheet with gross cash (excluding client funds) at 30 June 2020 of £22.0 million (30 June 2019: £24.0 million) and net funds of £4.9 million (30 June 2019: £7.2 million). The long term debt is secured on the freehold properties and was increased in the period by an additional £1.5 million at an effective fixed rate of 3.0% as announced on 29 May 2020. Excluding treasury shares, at 30 June 2020, the Company had 41.6 million shares in issue (30 June 2019: 41.1 million) and held 0.4 million (30 June 2019: 0.9 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.)
The R&D Consultancy Division reflects the increasing convergence of the Applied Science, Product Development and Advisory business activities. This Division incorporates not only leading science and engineering capabilities but also expertise in key vertical sectors, namely: Medical; Consumer; Food & Beverage; and Industrial. The Medical sector had a particularly strong performance in the first half, including participation in the UK Government’s urgent ventilator initiative.
For the six months ended 30 June 2020, the R&D Consultancy business generated services revenue of £15.3 million (H1 2019: £13.6 million). Total revenue of £18.8 million (H1 2019: £14.4 million) includes significant non-services (materials) pass-through revenue in H1 2020 related to the UK Government ventilator project.
Whilst the R&D Consultancy Division performed well in the first half of 2020, the ongoing effects of Covid-19 around the world are resulting in a cautious return of our clients to office/laboratory working environments which may delay the economic recovery in some markets, potentially impacting R&D investment programmes. The Board is carefully monitoring this economic uncertainty but has decided to increase investment in the USA sales organisation to address the reduction in international business travel which may persist for some time.
Regulatory & compliance
The Regulatory & Compliance Division includes the North American and European operations of TSG, acquired in 2017, and the Leatherhead Food Research business, acquired in 2015. The Group’s European regulatory and compliance activities have now been integrated, a natural evolution of the TSG and Leatherhead operations, with the businesses now being managed under a single Managing Director.
For the six months ended 30 June 2020, the Regulatory & Compliance Division generated revenue of £10.0 million (H1 2019: £8.7 million). This organic growth of 15% resulted from a strong performance of the TSG businesses benefitting from the increased demand for products responding to the pandemic. This momentum is anticipated to continue in the second half of the year, particularly in the USA, although the reported growth rate will reduce, reflecting a stronger prior year H2 comparator.
Frontier Smart Technologies (‘Frontier’)
Following the completion of the acquisition of Frontier in October 2019, a substantial accelerated restructuring programme was successfully executed, including the closure of the Romanian operations, a streamlining of product lines and the restructuring/relocation of the Cambridge and London operations. This intense programme, which produced a substantial reduction in the operating cost base, positioned Frontier to report an adjusted operating profit in the first half of 2020, despite revenue being impacted by the pandemic. For the six months ended 30 June 2020, Frontier reported revenue of £7.5 million (H1 2019: £nil) and an adjusted operating profit margin of 7% (H1 2019: nil), although the underlying adjusted operating profit margin was 9% after adding back the IFRS 3 revaluation of acquired inventory.
Importantly, whilst the market was severely affected as a result of Covid-19 by first the closure of China manufacturing operations and then retail outlets in Europe, Frontier not only reported a respectable profitability but also maintained its market share. As a result, orders for the second half of the year are anticipated to be close to pre-Covid-19 plan levels and it is anticipated that the Frontier business will continue to see the benefits of the turnaround.
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 £21.3 million (30 June 2019: £21.5 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 it is the declared intention to address this anomaly. However, this action if/when effected will result in a tax payment outflow of approximately £2 million and has prudently been deferred following the Covid-19 outbreak.
For the six months ended 30 June 2020, the rental and associated services income derived from the Group’s freehold properties was £2.2 million (H1 2019: £1.9 million). Income of £0.6 million (H1 2019: £0.5 million) was generated from third-party tenants and £1.6 million (H1 2019: £1.4 million) from the Group’s operating businesses. Adjusted operating profit was £0.8 million (H1 2019: £0.7 million). Intra-group charges are eliminated on Group consolidation but the reported profit for each operating business includes property rental at market rates. (The prior year results of Freehold Properties have been restated, refer to Note 4 for further details).
The Group’s debt of £17.1 million at 30 June 2020 (£16.8 million at 30 June 2019) is secured against the freehold property assets and the associated interest charge for the six month period was £0.4 million (H1 2019: £0.4 million). Interest on the debt is reported below operating profit in the consolidated results.
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 2019: £0.9 million).
In light of uncertainty about the future course of the pandemic and its economic consequences, the Board, did not recommend the payment of a dividend at the Annual General Meeting. The Board will consider whether or not an interim dividend is appropriate later in the year.
In summary, the performance of the Group in the first half of 2020 has been ahead of the Board’s pre-Covid-19 expectations, despite the operational challenges resulting from the pandemic. The excellent first half provides a solid platform for the rest of the year.
While actively recruiting for key roles to strengthen the Group and to position the organisation in a post-Covid-19 world, the Board recognises the inherent uncertainty and lack of predictability in the months ahead and will therefore remain prudent. However, with a strong balance sheet including significant cash resources, the Board continues to cautiously explore both add-on acquisitions and larger opportunities to increase the scale of the Group.