AIM-quoted science and technology consultancy Science Group (LON: SAG) has built up an 11.7% stake in fully listed environmental and engineering consultancy Ricardo (LON: RCDO). This is described as a strategic investment.
The initial purchases were between 16 and 27 February and cost £12.2m, which is an average of roughly 231p/share for a 8.46% stake. There were subsequent purchases. But no figure has been put on the additional shares.
Briarwood Chase Management has cut its stake in Ricardo from 5.42% to 2.16%. The largest shareholder is Gresham House with 22.5%.
The Ricardo share price was 214p on 14 February. It has subsequently been as high as 250p. The current share price is 220p. That is 47.6% down since the end of 2024. At the end of January, Ricardo warned that delayed orders will mean that forecasts would not be met.
Results
In the six months to December 2024, continuing revenues edged up by 1% to £169.1m, while a loss of £3m was turned into a pre-tax profit of £4.1m. These figures were affected by the sale of the defence business for £72.3m. The dividend was cut from 3.8p/share to 1.7p/share.
Environment and energy division revenues were lower, but the operating profit contribution improved thanks to better margins in some parts of the division. The transport division returned to profit.
Net debt was £18.5m at the end of 2024. Part of the disposal proceeds have been used to buy an 85% stake in E3 Advisory in Australia for an initial £34.5m.
The order book is worth £393m. Zeus forecasts a full year pre-tax profit of £12.7m, down from £30.5m including the defence business, rising to £15.8m next year. The Ricardo share price is equivalent to 14 times prospective 2024-25 earnings.
What is the attraction?
Science Group has a higher market capitalisation than Ricardo. Management wants to talk to the Ricardo board in relation to the investment. It is possible that Science Group could have some positive input.
Ricardo is already reducing its cost base and trying to improve cash generation. The target operating margin is 10%, which is nearly double the 5.4% expected in 2024-25. The dividend I being rebased from 12.7p/share to 5.4p/share in the year to June 2025 and could then grow steadily from this level.
Debt should come down, but it is likely to increase initially. The high borrowings are likely to hold back the share price.
Organic growth is anticipated to be in mid-single digits with a focus on environmental and energy. There is significant potential to improve profitability if management can get it right.
If the performance of the business is not significantly improved, then Science Group may be tempted to bid. This will probably not happen in the short-term, but there is a good chance it could happen further out. It is possible that the share price could remain depressed, and Science Group may take further opportunities to add to its stake.
Ricardo is an attractive recovery prospect. Even if Science Group does not bid another bidder could come along. This is not a short-term investment. A longer term view needs to be taken.