INTERIM RESULTS FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2023
- Record H1 results despite economic environment
- Revenue increased by 25% to £56.1m (H1 2022: £44.8m)
- Adjusted* operating profit increased by 18% to £10.4m (H1 2022: £8.8m)
- Adjusted* basic EPS increase of 14% to 16.6 pence (H1 2022: 14.6 pence)
- Strong balance sheet with Group cash of £29.2m and net funds of £15.7m (H1 2022: £38.6m and £23.9m) after completion of TP Group acquisition
- Integration of TP Group progressing in line with the Board’s expectations
Interim Results 2023
Science Group is a science & technology business providing consultancy and systems to an international client base. The Group comprises five operating divisions, supported by a strong balance sheet including significant cash resources and freehold property assets.
For the six months ended 30 June 2023, Group revenue increased by 25% to £56.1 million (H1 2022: £44.8 million). Adjusted operating profit increased by 18% to £10.4 million (H1 2022: £8.8 million) producing an adjusted basic earnings per share increase of 14% to 16.6 pence (H1 2022: 14.6 pence).
The Group retains a robust balance sheet with Group cash (excluding client funds) at 30 June 2023 of £29.2 million (30 June 2022: £38.6 million) and net funds of £15.7 million (30 June 2022: £23.9 million). During the period ended 30 June 2023, cash outflow funding the TP Group (‘TPG’) acquisition was c.£17 million and £3.3 million was returned to shareholders through dividends and share buybacks. In addition to the long-term debt of £13.5 million, which expires in September 2026, the Group has a £25 million Revolving Credit Facility which to date has not been drawn.
Excluding treasury shares, at 30 June 2023, the Company had 45.2 million shares in issue (30 June 2022: 45.5 million) and held 1.0 million shares in treasury (30 June 2022: 0.7 million). Total voting rights at 30 June 2023 were 45.1 million. During the period, an aggregate of 0.3 million shares were purchased for treasury at an average price of 401 pence per share.
The Consultancy Services Segment comprises Research & Development, Regulatory & Compliance and Defence & Aerospace divisions.
Revenue in the first half of the year increased to £42.3 million (H1 2022: £29.1 million), producing an adjusted operating profit of £11.5 million (H1 2022: £7.0 million). Revenue for Consultancy Services includes a contribution from Defence & Aerospace from 26 January 2023, following the completion of the TPG acquisition.
Research & Development
The R&D Consultancy Division combines leading science and engineering capabilities with market and commercial expertise, to provide product development and advisory services to key vertical sectors. The largest sector continues to be Medical and all sectors performed broadly in line with the Board’s expectations despite the more challenging economic environment. The Consumer and Food & Beverage sectors have recently been consolidated reflecting the similarity in customer profiles and, following the completion of the TP Group acquisition, the first sales into the Defence sector have been achieved, confirming the corporate strategy.
For the six months ended 30 June 2023, R&D Consultancy generated revenue of £18.5 million (H1 2022: £18.4 million). Operating margin for the Division increased in the period, benefitting from the strong US Dollar and the currency hedge (at $1.20/£1) implemented in 2022 which extends to the end of 2023.
Regulatory & Compliance
The Regulatory & Compliance Division includes the European and North American operations of TSG and Leatherhead Food Research, providing scientific and regulatory advice to a diverse client base.
The UK/Europe businesses performed particularly well, benefitting from significant contract wins in 2022. This was partially offset by a more challenging environment in North America as R&D investment in the relevant market sectors reduced from the Covid peak, compounded by the widely reported bottlenecks in product approvals at some USA regulatory authorities. With a stable and strengthening business, the Board has decided that it is now appropriate to consolidate the Division under a single Managing Director, a structure that will support greater trans-Atlantic opportunities whilst providing operational and cost efficiencies.
In aggregate, for the six months ended 30 June 2023, Regulatory & Compliance generated revenue of £12.1 million (H1 2022: £10.7 million). Operating margin in the Division increased considerably, particularly within the European business.
Defence & Aerospace
The Defence & Aerospace Division provides programme management and technical expertise for complex technology-related programmes.
Since completion of the acquisition of TPG on 26 January 2023, the Division has been increasingly integrated into Science Group. A new Managing Director, from within TPG, has been appointed, supported by a new senior leadership team and significant improvements in corporate and operational governance have been introduced. A review of strategy, resourcing model and facilities is progressing well with underperforming activities being addressed to provide a stronger platform for the future. In addition, the anticipated synergies with the Group’s Research and Development Division are already producing results.
For the period from 26 January to 30 June 2023, the Division contributed revenue of £11.7 million (H1 2022: nil). The business currently operates at a significantly lower profit margin than the other Consultancy Services Divisions within Science Group. While this is partly due to defence market characteristics, there are a number of areas identified to improve performance.
Frontier Smart Technologies (‘Frontier’)
Frontier is the leading provider of DAB/DAB+ radio semi-conductors/modules. Consistent with the widely reported, severe decline in consumer electronics markets, and against a very strong comparator in the first half of 2022 when market behaviour was influenced by supply-chain factors, Frontier reported revenue of £5.4 million for the six months ended 30 June 2023 (H1 2022: £15.3 million). This resulted in a small loss in the current period. As with all consumer electronics businesses in the current economic climate, Frontier is focused on operational efficiency and, now under a single Managing Director, is in the process of consolidating operations into Shenzhen to eliminate the costs of an office in Hong Kong.
Despite the current challenging conditions across the consumer electronics sector, Frontier is believed to have maintained its market share and premium market positioning in its target market. The business has continued to invest in new products, all costs of which are expensed with no capitalisation of R&D, such that Frontier recently launched Magic X, a new cost-optimised module, and is investing in a new connected audio module to be released in 2024. As a result, the business is well positioned to benefit from the recovery in consumer electronics which is anticipated to correlate with the economic cycle.
Critical Maritime Systems & Support (‘CMS2’)
CMS2 is the rebranded TPG Maritime business which designs, develops and manufactures submarine atmosphere management systems for the defence sector. CMS2 became part of Science Group on 26 January 2023 when the TPG acquisition completed. In the period from 26 January to 30 June 2023, CMS2 generated revenues of £7.9 million (H1 2022: nil) and a modest adjusted operating profit.
Subsequent to Science Group’s 2021 investment in TPG, significant onerous legacy contracts came to light in the Maritime subsidiary, placing the viability of the business at serious risk. A process of resolving those contracts was undertaken during 2022 with all major contracts now substantially renegotiated. As a result, the Division has a good order book, although the revenue recognition is less predictable due to the long-term project characteristics of the systems business.
CMS2 has a long track record and, despite the challenges previously reported by TPG, remains the leading provider of systems to its target market. With an increasing defence market interest in submarine capability and resolution of the onerous contracts, Science Group is expanding the CMS2 facilities in Portsmouth and, as set out in the Scheme circular in October 2022, also increasing investment in both product upgrades and next-generation systems.
Corporate & Property
On 26 January 2023, the acquisition of TPG completed and from that date the continuing business results are reported as part of the Group. Prior to this date, TPG was accounted for as an associate. Including the share purchases in 2021, the professional fees incurred and restructuring costs, the aggregate investment in TPG was approximately £30 million, with c. £17 million being incurred in the first half of 2023. Westek, a non-core operation of TPG, was disposed of in February 2023.
Integration of TPG into Science Group’s governance model is well advanced. In addition, operating business improvements are being implemented and business strategy reviewed to improve margins and operational efficiency. TPG central costs have been significantly reduced, dormant companies are being struck off and consolidation of facilities is progressing. In addition, a warranty claim related to the disposal of Sapienza in 2022 was settled removing future distraction and liability. In parallel the Group is increasing investment in both TPG Services and CMS2 to position for the future.
The Group retains two freehold properties, Harston Mill (Cambridge) and Great Burgh (Epsom). The properties are held at a book value of £20.7 million (H1 2022: £20.9 million) although the last independent valuation (March 2021) valued them in a range of £21 million to £35 million. Revenue from Property, excluding inter-group charges, was £0.4 million (H1 2022: £0.3 million).
Summary and Outlook
In summary, the first half of 2023 has continued the Group’s track record of resilient performance, delivering record results in line with the Board’s expectations. However the Board does not underestimate the potential impact of the prolonged uncertainty in the current economic environment, both UK and international, and is maintaining its conservative attitude to risk, governance and financial discipline.
At the same time, economic downturns may present further acquisition and/or investment opportunities for Science Group. With a very strong balance sheet, including significant cash resources and undrawn debt facilities, Science Group is well placed to explore any such opportunities.