Science Group (SAG)


Science: Mixed results mask value

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Research and development consultancy Science experienced growing pains in 2015. They should pass.

Research and development consultancy Science experienced growing pains in 2015. They should pass.

In full-year results to December 2015 Science, formerly Sagentia, reported revenue up 10%, but a 2% decline in adjusted profit compared to the previous year. Cash flow, normally strong, plunged sharply negative.

Even though unadjusted profit is much lower, because it includes over £1.5m in exceptional costs, the results are not as bad as they might seem.

First, let’s deal with cash flow. The principal reason for the out-flow was investment. It’s an old fashioned concept, but the company actually bought a new premises in Epsom, its second major UK office and laboratory after its Harston headquarters, near Cambridge. Science is moving OTM, a consultancy it acquired in 2013, and Leatherhead Food Research, which it acquired last September, to the new site.

Leatherhead impacted the results negatively in (at least) three more ways. The consultancy was bought out of administration by Science, and is losing money. The adjusted profit figure of nearly £4m is depressed by £500,000 in losses at Leatherhead. Obviously management expects to turn Leatherhead into a profitable business so this year’s loss should not be indicative of future years. The reported profit figure also includes £500,000 of costs relating to the integration of Leatherhead and Oakland Innovation, acquired earlier in the year, and deemed to be one-off in the adjusted profit figure. The two acquisitions were also paid for in cash (mostly).

OTM, the other business moving into the Epsom site reduced reported profit this year too, although Science, and I, have treated the write-off of just over £1m in goodwill as exceptional and not included it in our adjusted figures. With the oil and gas industry contracting due to relatively low oil prices, the acquisition of OTM, an oil and gas technology consultancy, now looks ill-timed.

Science is still performing pretty well. Return on capital (ignoring the exceptional cost of the integration of Leatherhead and the write off of Goodwill associated with OTM, but not operating losses at Leatherhead) is about 20% and while the company’s acquisitions have yet to prove themselves, they should do.

Science develops products and provides strategic advice to companies across an increasingly wide range of activities including medical, consumer and industrial. There is really only one way for a business whose main resource is scientists to grow, and that is to recruit more scientists. Science can recruit them piecemeal or en-masse by acquiring other consultancies.

The company turned itself around towards the end of the last decade by developing a sharper commercial focus and it seems plausible it might improve the performance of the consultancies it acquires. They might also benefit from the cachet of a Cambridge headquarters, which has a high reputation for science, and a ready supply of scientists.

Reassuringly, chairman and major shareholder Martyn Ratcliffe reports:

The restructuring and realignment of the Leatherhead business operations is progressing as the Board anticipated. However, the potential synergies of the Leatherhead operations with Oakland and Sagentia have become increasingly apparent and the Group’s existing offerings to the food & beverage market have been significantly enhanced by this acquisition.

Cambridge based Sagentia and Oakland serve various consumer and industrial markets including food and beverage.

A share price 128p values the enterprise at about 12 times adjusted profit. The earnings yield is 8%. I think that’s good value.


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