Dr Arnab Basu, chief executive of Sedgefield-based Kromek (KMK:24.25p), a radiation detection technology company focused on the medical, security and nuclear markets, was in bullish mood during our results call. He had reason to be as his company has just hit a major inflexion point, having posted cash profits of almost £500,000 on revenues up a third to £11.9m in the 12 months to end April 2018.
Moreover, finance director Derek Bulmer points out that he expects the business to be cash flow neutral in the current financial year and the build in receivables ahead of a recent move to a new production facility to reverse. He also says that two thirds of analysts’ revenue estimates of £15m is already covered by firm orders. Following a 19 per cent post-results upgrade, analysts Paul Hill and Andy Edmond at Equity Development expect Kromek’s cash profits to more than treble to £1.66m this year, highlighting the strong operational gearing whereby with the benefit of a relatively fixed cost base an increasing amount of gross profit drops straight down to the bottom line as sales rise.
The order pipeline has been growing at quite a pace too. When I first advised buying the shares at 25p ('Follow the smart money', 27 Feb 2017), after which the price hit 37p before profit taking took hold, Kromek had taken in firm orders worth $38.6m (£29.5m) since the summer of 2015. I can reveal that Kromek has now signed $75m worth of orders in the past three years or so and a number of potential clients “have been carrying out due diligence as part of the potential order placement”, so expect further news from its medical imaging and nuclear businesses which between them account for 90 per cent of revenues.
In nuclear, Kromek has developed a 'dirty bomb' detector that is 10 times faster at detecting gamma and neutron radiation, and at a tenth of the cost of conventional detectors. The US government is a big customer, having taken 10,000 units to date, but the big hope is that Kromek will land a slice of a $8.2bn contract that could see its ‘dirty bomb’ detectors rolled out across 20 plus cities across the US. Each contract could be worth $10m, offering massive profit upside if secured.
The company’s patented core cadmium zinc telluride (CZT)-based radiation detection technologies has been proving popular with Kromek’s 11 OEM customers in medical imaging across SPECT, bone mineral densitometry (to treat osteoporosis), and gamma probes (used for radio-guided surgery). The innovative detectors are capable of diagnosing and monitoring conditions like Parkinson’s disease and making early diagnosis of cancer too.
Market leader GE Healthcare has been investing tens of millions of dollars in its own CZT-SPECT cameras, stealing a march on major OEM rivals such as Siemens, Philips and Toshiba. This has prompted analysts at Equity Development to speculate that GE’s competitors may “look to backwards integrate in order to lock-in a guaranteed supply source”. Interestingly, they note that “Kromek is the only independent, end-to-end CZT manufacturer with the required design, engineering and technological skills to produce sufficient commercial quantities of the material in the desired timeframes and at the targeted price levels”. It’s no coincidence that Kromek moved into a new facility in Pittsburgh, Pennsylvania which has the requisite capacity to scale up production of CZT-SPECT camera production.
The bottom line is that with cash profits set to treble and Kromek highly operationally geared too, then any new large orders for its dirty bomb detectors or in medical imaging are likely to be well received. So, having last advised buying at 24.3p (‘Strategic acquisitions’, 9 May 2018), I maintain my 34p target price. Buy.
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