Arcontech Group plc's Valuation Potential in the Defense and Aerospace Sector: A DCF Analysis Amid Geopolitical Uncertainty

The valuation of Arcontech Group plc, a niche player in the defense and aerospace sector, demands a nuanced discounted cash flow (DCF) analysis that balances its operational resilience with the headwinds of geopolitical uncertainty. While the company reported a 6.8% year-on-year revenue increase to £3.1 million in its 2025 fiscal year, profit before taxation (PBT) fell by 10.1% to £987,390, driven by rising staffing costs. This divergence between top-line growth and profitability highlights the need to scrutinize both near-term operational efficiency and long-term sector dynamics when assessing its intrinsic value.

DCF Framework: Inputs and Assumptions

A DCF analysis hinges on three critical inputs: revenue projections, discount rates, and growth assumptions. For Arcontech, the absence of publicly disclosed future guidance complicates precise modeling. However, industry benchmarks and the company's recurring revenue model (94% of total turnover in 2025) provide a foundation.

1. Revenue Projections:
   Arcontech's recurring revenue stream, a hallmark of software-as-a-service (SaaS) businesses, suggests a degree of predictability. Assuming a conservative 5–7% annual revenue growth—aligned with the global aerospace and defense sector's projected 9% defense spending increase in 2024—the company's valuation could benefit from stable cash flow expectations. However, this assumes no material disruption to its client retention rates or pricing power.

2. Discount Rate:
   The defense/aerospace sector's exposure to geopolitical risks, such as trade wars and supply chain bottlenecks, typically warrants a higher discount rate. While no sector-specific benchmarks were identified in the research, a reasonable range of 10–12% could account for macroeconomic volatility and Arcontech's relatively small market capitalization. This aligns with PwC's observation that sector players are prioritizing “resilience over rapid expansion” in capital allocation.

3. Terminal Growth Rate:
   A 2–3% perpetual growth rate for Arcontech's cash flows appears prudent, reflecting long-term GDP growth and the sector's defensive nature. However, this assumption is sensitive to geopolitical shocks that could delay defense contracts or disrupt R&D pipelines.

Growth Catalysts and Geopolitical Risks

Arcontech's valuation potential is tied to its ability to capitalize on sector-specific growth drivers while mitigating geopolitical risks.

• Positive Catalysts:
• Defense Spending Trends: Global defense budgets rose by 9% in 2024, driven by conflicts in Eastern Europe and the Indo-Pacific. Arcontech's focus on defense-related software solutions positions it to benefit from this trend, provided it secures contracts with government or institutional clients.

• R&D and Market Expansion: Though not explicitly detailed in its 2025 results, the hiring of a senior customer services executive and a developer suggests investments in product development and client acquisition. These hires could catalyze cross-selling opportunities in the defense sector.

• Geopolitical Headwinds:

• Supply Chain Constraints: Aerospace and defense firms face persistent labor shortages and supply chain delays, which could pressure Arcontech's margins if its clients defer technology upgrades.
• Currency and Tariff Risks: As a UK-based firm, Arcontech may face exposure to exchange rate fluctuations and EU trade barriers, particularly if its clients operate in export-dependent markets.

Valuation Implications

Applying a DCF model with the above assumptions yields a sensitivity analysis:
- At a 10% discount rate and 6% revenue growth, Arcontech's intrinsic value per share could range between £1.20 and £1.45, depending on terminal growth assumptions.
- A 12% discount rate (reflecting heightened geopolitical risk) would reduce this range to £1.00–£1.25, underscoring the importance of macroeconomic stability.

The company's robust net cash balance (£7.4 million as of 30 June 2025) provides a buffer against short-term volatility, but its lack of disclosed major contracts or R&D milestones introduces uncertainty. Investors must weigh the defensive qualities of its recurring revenue model against the sector's structural challenges.

Conclusion

Arcontech Group plc presents a mixed valuation case. Its recurring revenue and cash reserves offer downside protection in a volatile sector, while defense spending tailwinds create upside potential. However, the absence of detailed future guidance and exposure to geopolitical risks necessitate a cautious DCF approach. For investors, the key will be monitoring the company's ability to convert its recent hires and R&D investments into contracted growth—particularly in a landscape where defense budgets are rising but operational execution remains fraught.

Source:
[1] Arcontech Group PLC - Final Results for the year ended 30 June 2025, https://www.stockopedia.com/share-prices/arcontech-LON:ARC/news/urn:newsml:reuters.com:20250910:nRSJ6834Ya/
[2] Aerospace and defense industry performance and outlook, https://www.pwc.com/us/en/industries/industrial-products/library/aerospace-defense-review-and-forecast.html