Contract momentum continues to build at Sedgefield-based Kromek (KMK:26.5p), a radiation detection technology company focused on the medical, security and nuclear markets. In fact, since mid-November, the company has won two significant awards, work on which has already commenced.
The first is a five-year supply contract worth at least $7.8m (£6m) from an existing original equipment manufacturer (OEM) customer, a leading company in X-ray imaging systems, for its next generation baggage security screening detectors. Kromek's proprietary cadmium zinc telluride (CZT) technology is designed to enhance the detection of an extensive range of threat materials and is being installed within the client’s existing baggage screening units to improve their accuracy and efficiency. It comes at a time when there is a strong tailwind driving the $2bn (£1.6bn) global security screening market in air transportation, ports, borders and freight.
Kromek was also been awarded its first contract (worth $1.99m over a 12-month period) for biological-threat detection by the Defense Advanced Research Projects Agency (DARPA), an agency of the US Department of Defense, to develop a proof-of-concept device for a vehicle-mounted biological-threat identifier. This builds on the success of the company's work with DARPA in nuclear-threat detection using its ‘dirty bomb’ detectors, which are 10 times faster at detecting gamma and neutron radiation, and at a tenth of the cost of conventional detectors.
The aim is to develop a next-generation vehicle-mounted system capable of rapidly identifying the pathogens used in any biological attack, enabling a quicker response and reduced harm to people and the environment. The new system will reduce the detection and pathogen identification time to just five hours, a huge time saving on current systems, which take between 36 and 48 hours. The ‘proof of concept’ contract could potentially be extended to a multi-year multi-million dollar contract for the development of a fully deployable system. I expect it will be, and is unlikely to be the only one, as the release of nerve agent Novichok in Salisbury highlights just how real the threat is from chemical/biological warfare.
Taking into accounts these two awards, Kromek has now won $22m of new contracts over the past 12 months, thus significantly de-risking estimates from analysts at both Cantor Fitzgerald and Equity Development, which predict that the company can boost annual revenues by more than a quarter to £15m and more than treble underlying cash profits to £1.65m in the financial year to the end of April 2019. The growing contract momentum also de-risks expectations of cash profits almost doubling to £3.1m on revenues of £18.8m in the 2019-20 financial year.
Moreover, analysts’ estimates don’t factor in the opportunity Kromek has with its ‘dirty bomb’ detectors if Kromek secures a slice of a huge $8.2bn US government contract. Each city contract could be worth $10m in revenue to Kromek. Clearly, it’s a waiting game here, but the company is well positioned given that the technology is already being used by 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. US Defense Threat Reduction Agency is also using it in the development of the next generation of handheld nuclear radiation detectors.
US government contracts aside, Kromek’s CZT-based radiation detection technology has real potential to deliver major contract awards in the medical imaging industry. It’s already being used by 11 OEM customers across single photon emission computed tomography (SPECT), BMD (to treat osteoporosis) and gamma probes (used for radio-guided surgery). If demand for CZT-SPECT medical imaging really takes off, as I suspect it will given that the detectors are capable of diagnosing and monitoring conditions such as Parkinson’s disease and making early diagnosis of cancer, Kromek is well placed to win contracts from rivals to market leader GE Healthcare which has been investing heavily in its own technology. That’s because Kromek has already invested in a state-of-the-art facility in Pittsburgh, Pennsylvania, that has the design, engineering and technological capabilities needed to produce commercial quantities of the material.
It’s worth pointing out that the 13 per cent fall in sterling against the US dollar since the start of Kromek’s 2018-19 financial year is providing a positive translational currency tailwind on international sales, as over half of Kromek’s sales are in US dollars. The bottom line is that net of £7.7m net cash on its balance sheet, the company’s enterprise value of £62.5m equates to 20 times cash profit estimates for the 2019-20 financial year, a multiple that could drop sharply if Kromek continues to win contracts at the current rate. That is a real possibility in my view, which is why I continue to rate the shares a buy and have a 37p target price, having first initiated coverage at 25p ('Follow the smart money', 27 Feb 2017). Buy.
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