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Kromek contracts building up

The radiation detection technology company has been winning a raft of contracts, which de-risk expectations of a further step change in revenues and profits this year
August 20, 2018

Sedgefield-based Kromek (KMK:26.5p), a radiation detection technology company focused on the medical, security and nuclear markets, has announced a raft of contract wins since I covered the full-year results ('Kromek turns inflexion point', 3 July 2018).

When I interviewed the directors in early July they revealed that a number of potential clients were carrying out due diligence as part of the potential order placement, the implication being that we could expect news of new orders for both its medical imaging and nuclear businesses, which account for 90 per cent of the company’s revenues. The fact that they have delivered $3.6m (£2.8m) of awards in less than a month adds weight to the likelihood of the company winning even more contracts, and also de-risks Equity Development's expectations that Kromek can lift revenues by more than a quarter to £15m in the financial year to end-April 2019, which would more than treble cash profits to £1.66m. Analysts Paul Hill and Andy Edmond at Equity Development estimate that more than two-thirds of their revenue forecast is covered by firm orders even at this early stage.

In the nuclear medicine instrumentation field, Kromek has just been awarded a $700,000 order from a new original equipment manufacturer (OEM) customer to supply its proprietary cadmium zinc telluride (CZT) detectors in the nuclear medicine market over an 18-month period. Today’s other award is a repeat contract worth $340,000 to supply CZT-based detectors to an existing customer in the bone mineral densitometry (BMD) market in the financial year to end-April 2019. Kromek’s patented CZT-based radiation detection technologies are used by a total of 11 OEM customers in medical imaging across single photon emission computed tomography (SPECT), BMD (to treat osteoporosis) and gamma probes (used for radio-guided surgery). The detectors are capable of diagnosing and monitoring conditions like Parkinson’s disease and making early diagnosis of cancer too, hence their increasing popularity.

The company’s technology is proving popular with the US Department of Homeland Security (to develop CZT detector modules for commercial off-the-shelf detectors for advanced X-ray systems in passenger baggage screening), and the Defence Threat Reduction Agency (for the development of the next generation of handheld nuclear radiation detectors). A few weeks ago, Kromek was awarded two contracts from the two US government agencies worth a minimum of $2.6m over the next three years. Kromek's technology can enhance the detection of an extensive range of threat materials and significantly reduce false alarms in aviation security for baggage handling. 

There is also real potential that its ‘dirty bomb’ detectors (10 times faster at detecting gamma and neutron radiation, and at a tenth of the cost of conventional detectors) will be rolled out across 20-plus cities across the US if Kromek secures a slice of an $8.2bn US government contract. Each city contract could be worth $10m in revenue alone, highlighting the substantial profit potential. The same is true if major OEM rivals to market leader GE Healthcare decide to contract Kromek as a CZT supplier for their own CZT-SPECT medical imaging cameras. Kromek is one of the few independent, end-to-end CZT manufacturers with the required design, engineering and technological skills to produce sufficient commercial quantities of the material, and has capacity to scale up production from its state-of-the-art new facility in Pittsburgh, Pennsylvania.

So, with potential for more multi-million dollar contracts to be landed, and blue sky potential too, I feel that the company is attractively priced on 18 times likely cash profits to enterprise value for the 2019-20 financial year. Having 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,  a return to those highs, and beyond, is a real possibility if the order book continues to build. Buy.

 

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