Science Group plc Posts Strong H1 2026 with Adjusted Operating Profit of £11.5m Despite UK Defence Market Challenges

Adjusted Operating Profit Growth and Margin Expansion Amid External Challenges

For the six months ending 30 June 2026, Science Group posted an adjusted operating profit of £11.5 million, a slight increase from £11.3 million in the same period last year. More notably, adjusted operating profit margin improved significantly to 24.3% from 19.7% in H1 2025. This margin growth reflects the company’s strategic focus on higher-margin activities and disciplined capital allocation.

The company acknowledged considerable external headwinds during H1 2026, including geopolitical instability in the Middle East that affected client confidence within the Sagentia division’s international corporate base. Concerns over rising energy costs, global inflation, and potential interest rate hikes caused investment delays and procurement slowdowns. While some sectors stabilized quickly, others took longer to recover. Despite these challenges, Science Group maintained strong financial discipline focused on profit, margin, and cash flow.

Core Revenue Decline Due to Strategic Reduction of Low-Margin Defence Activities

Core revenue, excluding low-margin pass-through defence revenue, decreased to £46.4 million from £48.7 million in H1 2025, while total revenue fell to £47.2 million from £57.2 million. This divergence is attributable to the company’s deliberate reduction of low-margin pass-through defence contracts, a strategy implemented over recent years to improve profitability and earnings quality rather than top-line growth.

Science Group’s entry into the UK defence market followed its 2023 acquisition of TP Group. The Sagentia Defence practice has been reducing exposure to low-margin pass-through activities, coinciding with delays in the UK Defence Investment Plan (DIP), which disrupted contracting. The DIP was released in July 2026, and Sagentia Defence has begun to see improved business activity, expected to continue in H2 2026. This indicates the revenue reduction was a strategic decision aligned with financial priorities rather than operational issues.

Sagentia Services Division Navigates Middle East Market Headwinds

The Sagentia Services division maintained an adjusted operating profit margin of 24.0%, nearly flat compared to 23.9% in H1 2025, with adjusted operating profit at £7.0 million versus £7.9 million previously. Core revenue excluding pass-through defence revenue was £28.2 million, slightly down from £29.0 million, while pass-through revenue declined from £4.2 million to £0.8 million.

Geopolitical turmoil in the Middle East significantly affected the division’s international corporate clients, creating uncertainty due to rising energy prices, inflation, and potential interest rate hikes. These factors delayed investment decisions and procurement. The company regards Sagentia’s performance as commendable under these conditions and expects most sectors to grow in the second half, viewing the revenue decline as cyclical rather than a sign of business deterioration.

Critical Maritime Systems & Support Achieves Outstanding Margin Improvement

Critical Maritime Systems & Support (CMS2), headquartered in Portsmouth, Hampshire, designs and supports submarine atmosphere management systems. The division achieved an outstanding adjusted operating profit margin of 38.3% in H1 2026, up from 21.9% in H1 2025, with adjusted operating profit rising to £4.3 million from £3.6 million. Revenue was £11.1 million compared to £12.3 million core revenue in the prior year.

The margin improvement was driven by contract timing and reflects typical volatility in CMS2’s revenue and margins. Total revenue in H1 2025 included £4.3 million of low-margin consumables revenue that did not recur in H1 2026, explaining the revenue decrease alongside margin gains. The company expects a more normalized margin for CMS2 over the full year, indicating the H1 2026 margin is above trend rather than sustainable at current levels.

Frontier Semiconductor Business Stable Despite DRAM Cost Pressures

Frontier, a leading developer of radio and audio semiconductors, remained stable despite significant DRAM cost increases affecting consumer electronics. The division launched its new Auria product during the period, expanding its addressable market beyond traditional offerings. H1 2026 revenue was £6.8 million, essentially flat compared to £7.1 million in H1 2025 after adjusting for currency effects and a one-off benefit. Adjusted operating profit held steady at £0.9 million.

DRAM cost increases were passed on to distributors, with a modest volume decline offset by higher prices and premium product mix. All Auria R&D costs continue to be expensed, maintaining close alignment between adjusted operating profit and cash flow. This accounting approach means current profitability does not fully reflect investment in new products, with future periods potentially benefiting from Auria’s commercial uptake.

Strategic Review Underway for Significant Freehold Property Assets

Science Group owns two major freehold properties: Harston Mill near Cambridge (approx. 9,000 sqm on 6.5 hectares) and Great Burgh near Epsom (approx. 4,000 sqm on 3.6 hectares). These sites primarily support group operations, with some third-party tenants at Harston Mill. The properties are valued on the balance sheet at £20.5 million. A December 2023 independent valuation estimated a range of £16.9 million to £31.6 million, indicating substantial potential upside.

The board has appointed advisers to explore options for enhancing shareholder value from these prime assets. While no specific plans or timelines were disclosed, possibilities include sale-leaseback, development, refinancing, or other transactions to unlock value. Investors may anticipate updates on this strategic review given the properties’ material balance sheet significance and potential as a value catalyst.

Share Buy-Back Programme Progresses with Expected 2026 Spend Above £20 Million

Science Group continues its active capital return strategy through a share buy-back programme. In H1 2026, it repurchased 2.4 million shares at an average price of 553 pence, returning £13.5 million to shareholders. Shares outstanding decreased to 40.8 million at 30 June 2026 from 44.4 million a year earlier, with 5.4 million shares held in treasury versus 1.7 million previously.

The board expects the 2026 buy-back allocation to exceed £20.0 million, subject to corporate activity. This reflects strong cash generation and balance sheet health. The programme is accretive to earnings per share, which rose to 20.4 pence in H1 2026 from 19.3 pence in H1 2025, benefiting from both improved profitability and reduced share count. Over the past year, £26.3 million was returned to shareholders through buy-backs and dividends, demonstrating disciplined capital management.

Robust Cash Generation and Financial Position Support Strategic Flexibility

During H1 2026, Science Group generated £10.7 million from operations with 94% cash conversion, compared to £21.2 million in H1 2025, which benefited from working capital normalization. The group ended the period with £67.9 million in cash and equivalents and net funds of £56.8 million. Its £30.0 million revolving credit facility with Lloyds Bank remains undrawn, providing liquidity through March 2030.

Cash decreased from £82.0 million at 30 June 2025 to £67.9 million at 30 June 2026, reflecting capital returned to shareholders via buy-backs (£13.5 million) and dividends, plus a £5.1 million tax payment related to 2025 corporate investment gains. The board continues to evaluate corporate opportunities with attractive risk-adjusted returns while maintaining shareholder returns, indicating balance sheet strength offers flexibility for acquisitions and capital distribution. This robust cash position and profitability provide strategic optionality amid external volatility.

Adjusted Earnings Per Share Growth and Stable Profit Before Tax

Adjusted basic earnings per share increased to 20.4 pence in H1 2026 from 19.3 pence in H1 2025, driven by higher underlying profitability and share count reduction from buy-backs. Reported profit before tax was £8.1 million, consistent with the prior year after excluding a £24.0 million exceptional corporate investment gain in H1 2025. This figure excludes £2.0 million amortisation of acquisition-related intangibles and a £0.9 million share-based payment charge.

Profit after tax was £5.981 million in H1 2026 versus £24.666 million in H1 2025, mainly due to the absence of the exceptional gain. The income tax charge of £2.166 million included an R&D tax credit of £359,000. Reported basic earnings per share was 14.3 pence, reflecting lower profit excluding exceptional items and fewer shares outstanding. Total comprehensive income was £6.177 million, including minor foreign exchange gains and cash flow hedge movements.

Board Outlook and Market Expectations for H2 2026

The board expressed cautious optimism for the second half of 2026, anticipating sequential growth primarily driven by the Services division. This outlook is supported by market stabilization in most sectors by end-H1, the July 2026 UK Defence Investment Plan release, and improving activity in the Sagentia Defence practice.

While describing the environment as volatile, the board does not foresee significant deterioration. Its commitment to capital deployment for corporate opportunities and an enhanced buy-back programme exceeding £20 million in 2026 signals confidence in the business trajectory. However, no specific profit, revenue, or margin guidance was provided. Investors will likely monitor management’s assessment of the DIP’s impact and the pace of Sagentia Defence’s recovery as key drivers of anticipated H2 improvement.