Some economists take the view that corporate UK has been held back because of a tendency towards short-termism. To support this view, they might point to the relatively high rates of distributions as a proportion of net earnings, to say nothing of the record share buybacks of recent years.
And the UK is certainly a laggard in terms of R&D spending as a proportion of gross domestic product. Figures from UNESCO suggest that we are a third-rank nation on that basis, predictably behind the likes of South Korea and Japan, but also trailing the smaller economies of such countries as Slovenia, Denmark and Finland.
In absolute terms, things aren’t quite so dire, as the UK is eighth in the global pecking order. But you are left wondering why we haven’t witnessed a surge in R&D budgets when you factor in ultra-low borrowing costs and the fact that the UK has the lowest corporate tax rate of any of the G7 economies. And it is not as though we haven’t got access to intellectual capital. The UK boasts four of the leading 10 universities in the world based on the QS World University Rankings for 2021.
Perhaps the relative size of the service sector in the UK helps to explain why we’re lagging the field on a pro rata basis. But there are certainly UK companies that have lengthier horizons where investment is concerned. Ricardo (RCDO) provides a case in point. The Sussex-based engineering and environmental consultancy has been trading for over a century. So you can safely assume that its business has been evolving in the face of change for decades. But it is one thing to change in reaction to market trends; quite another to change in anticipation of them.
But that’s exactly what Ricardo managed to do in 2012, when it bought AEA Europe out of administration for a modest £18m. AEA Europe had a track record of advising governments in the development of environmental legislation, but management at Ricardo envisaged that this area of public policy was set to gain prominence in the private sector, thereby providing significant new consulting opportunities.
The value of the business unit, now trading as Ricardo Energy & Environment, has become more apparent as commercial disruption has dragged on other parts of the business. It was the only segment of the group that managed to increase revenue in the last six months of 2020. In addition, underlying operating profits increased by 27 per cent despite a significant increase in headcount. And the order book was also heading in the right direction, finishing at £41.5m, a 17 per cent increase on the comparable half-year.
It should also be remembered that all this was achieved despite ongoing uncertainties in relation to the UK/EU trade deal. With a Europe-based subsidiary in operation, Ricardo does not expect any impact from the finalised agreement. Indeed, the group is benefiting from a significant increase in workload from the European Commission.
The existing public/private revenue split is roughly 60/40, but we are likely to witness a rebound in activity for the latter sector (particularly automotive) as we move through FY2021. The probable strength of any prospective recovery is difficult to estimate, but it is nailed on that the group will continue to profit from the various governmental and corporate pledges on the environment.
For now, the capital that Ricardo has allocated to Energy & Environment has made it the fastest-growing segment within the group. And with R&D projects in the works, including a hydrogen power collaboration with AFC Energy (AFC), management’s prescience on the environmental front is paying off for shareholders.
