SCIENCE GROUP PLC (SAG) — Investment Research Note

Executive summary

Science Group is a UK-listed (AIM) technology & engineering services/systems group operating three units: Sagentia (product-development and regulatory consulting), CMS2 (submarine atmosphere-management systems for naval defence) and Frontier (DAB/DAB+ radio semiconductors), backed by two freehold Cambridge/Epsom properties and a £57m net cash pile. Over 2021-2026 the group has converted the Frontier turnaround, the TP Group acquisition (2023) and disciplined margin management into a consistent record of £20-23m Adjusted Operating Profit, with H1 2026 AOP of £11.5m sustaining the trajectory despite UK Defence Investment Plan delays and softer consultancy demand 2026-07 interims. The valuation-relevant point today is that the market cap of £238m almost entirely comprises operating value plus £57m net cash and ~£25-30m of freeholds — the shares screen as fair value, not obviously cheap, on ~14.5x FY25 adjusted EPS.

Fair value estimate

Methodology: sum-of-parts on FY25 segment AOP, cross-checked against forward P/E.

Segment EBIT capitalisations (post amortisation, using segmental AOP):

• Sagentia (Services): £18.8m FY25 AOP × 10x = £188m
• CMS2 (submarine systems): £5.5m FY25 AOP × 8x = £44m (H1 26 margin exceptionally high at 38%; use normalised ~£6-7m)
• Frontier: £1.1m FY25 AOP × 5x = £6m
• Freehold Properties: mid-point of 2023 independent valuation range (£16.9-31.6m) = £24m
• Central/PLC costs: -£3.1m × 10x = -£31m
• Net funds (post-dividend): £57m
• Total EV: ~£288m, per share = ~710p

Cross-check on P/E: FY25 diluted adjusted EPS 39.4p. Buyback (>£20m in 2026 flagged) shrinks share count ~3-4%. Applying 12-15x to a FY26 EPS of 42p gives 504-630p. Adding surplus cash beyond operational needs (£30-40m, or ~75-95p) lifts the range to ~600-720p.

Fair value range: 600p – 720p per share (implied mcap £244m – £293m). Absolute upside vs 585p current: +3% to +23%; midpoint ~660p, +13%.

Sector context

Correctly classified as Industrial Goods & Services. Quality profile (net cash, mid-20s services margins, freeholds) sits above typical AIM industrials. Comparable listed peers: RWS Holdings, Ricardo plc (recently taken private after SAG's activist stake — see 2025-04 filing), and to a degree Renew Holdings, Judges Scientific and Jacobs Solutions internationally. Sagentia's closest small-cap analogues are Judges Scientific and specialist life-sciences consultancies.

Investment thesis

• Fortress balance sheet enables opportunistic capital deployment: £67.9m gross cash / £56.8m net funds with a £30m undrawn RCF; the recent Ricardo trade generated a £24m pre-tax gain (74% ROI) demonstrating management's ability to convert idle cash into shareholder returns 2025-07 interims.
• Structural buyback + dividend shrinking share count: >£20m planned buyback in 2026 on top of £26m returned in the trailing year at ~553p average; total voting rights lower today than 15 years ago despite substantial growth 2026-05 AGM update; 2026-07 interims.
• Defence exposure inflecting: CMS2 has forward visibility into the 2030s on UK/international submarine programmes; Sagentia Defence positioned to recover following the July 2026 release of the delayed UK Defence Investment Plan 2026-07 interims; 2026-05 AGM update.

Key risks

• Consulting cyclicality and geopolitical headwinds: Sagentia revenue softness (-£2.6m H1 26 core vs prior) tied to Middle East disruption and Defence delays — services demand can slip further if the macro deteriorates 2026-07 interims.
• Frontier is a small, fragile, discretionary consumer-electronics business: rising DRAM costs, weak consumer spend, and unit volume decline. Auria (new connected audio) launched but limited early volumes; long-term strategic review still open 2026-07 interims; 2026-05 AGM update.
• Value realisation of freehold property depends on strategic action: book value £20.5m understates likely market value but is dependent on the Board successfully executing the "options" being explored — no timetable 2026-07 interims.

Operating leverage

Operating leverage is moderate rather than high. Sagentia is a people-based consultancy where cost scales with headcount — the H1 26 result of holding AOP margin at 24% on lower revenue is impressive but shows costs are actively flexed, not fixed. CMS2 has more meaningful operating gearing (H1 26 margin spiked to 38.3% on £11m revenue vs 21.9% previously as project mix changed) but revenue is lumpy and consumables-driven. Frontier expenses all R&D so incremental revenue drops through at reasonable rates but the whole segment is small (£13m FY25 revenue, £1.1m AOP). Central corporate costs of ~£3m/year and the Group's ~£23m fixed cost base is small relative to £112m revenue, so a 10-20% Group revenue beat would plausibly add ~30-50% to AOP, not multiples. Not a "long-tail upside" business 2026-07 interims; 2025-07 interims.

Value-trap signals

• Core services revenue trend is flat-to-slightly-declining (H1 26 core £46.4m vs H1 25 £48.7m; FY25 £112m vs FY24 £111m).
• Low share price/index performance in absolute terms: shares have essentially traded sideways at 520-612p for a year despite consistent profitability and buybacks — a signal that the market rates the group as ex-growth.
• AIM listing at small-cap size limits multiple expansion; Board explicitly notes "relative valuation as a London-listed company remains a constraint" 2026-05 AGM update.
• No material top-line growth strategy beyond bolt-on M&A / capital returns.

Earnings vs. expectations

Across the covered period Science Group has almost invariably reported "in line" or "slightly ahead" of Board expectations: FY23, FY24 and 2025 trading updates each flagged "in line or slightly ahead" 2023-11, 2025-01, 2025-10 trading updates; H1 25 was slightly ahead on organic performance and materially ahead on statutory earnings due to the Ricardo gain; H1 26 landed in line. The company does not disclose specific consensus figures but the pattern is consistent modest beats with no visible profit warnings over five years — a positive track record.

Conviction

Conviction: 4 (high)

Anchors: (1) clean, consistent IFRS disclosure with meaningful segmental data; (2) durable balance sheet with ample cash cushion reducing tail risk on the valuation; (3) multi-year track record of meeting expectations that gives confidence in the forward earnings base.

Caveats: (1) freehold property fair value is a genuine unknown until sold or independently revalued (last independent valuation was 2023 with a wide range); (2) segment mix (defence timing, Frontier consumer cyclicality) creates ~10-15% swings in H1/H2 profitability that make any single-year multiple approximate.