Investors should really not be concerned by the fall in first-half revenue (from £4.8m to £3.7m) and the £600,000 cash loss reported by Sedgefield-based Kromek (KMK:26p), a radiation detection technology company focused on the medical, security and nuclear markets.
Kromek moved to a state of the art facility medical-grade facility in Pittsburgh last year that has the design, engineering and technological capabilities needed to produce commercial quantities of cadmium zinc telluride (CZT) crystals. The anticipated disruption meant that between £1.5m and £2m of sales were pushed into the second half of the financial year to end April 2019 as a result, hence the first half sales shortfall. They will be delivered.
More important is the fact that chief executive Dr Arnab Basu says that his company is bang on course to achieve the £15m of revenues the market is expecting for the full year, up from £11.9m in the previous year, buoyed by $18m (£14m) worth of orders won since the start of May 2018. In the past three years, Kromek has won $80m of contracts and analysts estimate Kromek’s current order book now exceeds $40m. I understand that of the £11.3m second half sales required to hit analysts’ full-year revenue estimates of £15m, about £5.1m have already been contracted for delivery, a further £4.1m are repeat orders, leaving only £2.1m of additional orders for Kromek to find, hence directors' confidence in hitting the full-year numbers.
Indeed, Dr Basu told me during our results call that Kromek has “a pipeline of near-term prospects in the process of being converted [into firm orders] that are a multiple of the $2m sales required [to hit the full-year outcome].” Moreover, forecast second half revenues of £11.3m should generate a cash profit of £2.25m. The company’s cash position will get a boost from the reversal of a £1.5m working capital build in the first half too. I would also flag up that Dr Basu says that about 72 per cent of analysts’ revenue estimates of £18.5m for the 2019/20 financial year are already in the bag, leaving just £5.2m of further orders to book in order to deliver the £3m of annual cash profit.
As I noted in my article earlier this month when the shares were priced around the current level ('Kromek’s contract momentum building', 3 January 2019), demand is ramping up for Kromek's CZT technology across all three of its market segments. In the medical imaging industry, it’s being used by 11 original equipment manufacturer (OEM) customers across single photon emission computed tomography (SPECT), BMD (to treat osteoporosis) and gamma probes (used for radio-guided surgery). For instance, the company’s CZT-SPECT medical imaging detectors are capable of diagnosing and monitoring conditions such as Parkinson’s disease and making early diagnosis of cancer.
In the nuclear sector, the company has been awarded a raft of contracts including one last month from 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 Kromek’s work with the US authorities in nuclear threat detection using its D3S ‘dirty bomb’ detectors, which are 10 times faster at detecting gamma and neutron radiation, and at a tenth of the cost of conventional detectors. Analysts at house broker Cenkos expect that a number of military and civilian pilot schemes will be upgraded to full roll-outs by the US Homeland Security over the next 12 to 24 months. They have good reason to think this way. Also, I can reveal that Kromek’s dirty bomb detectors are currently being piloted in five locations outside the US. Expect a firm order to be placed with a value of around $5m to $15m for the first location within the next 12 months.
It’s also worth flagging up that Kromek has won a slew of orders in baggage screening including a $7.8m contract from an existing OEM customer to incorporate Kromek’s customised detector modules into the client’s baggage screening products. The point here is that new and tighter aviation regulations being introduced in Europe and the rest of the world are now driving customers to adopt Kromek’s cutting-edge technology in response to higher security screening standards.
Trading on a deep discount to analysts’ target prices of between 40p (Equity Development) and 45p (Cantor Fitzgerald), and with order momentum expected to ratchet up as adoption of Kromek’s CZT technology gains further traction, I maintain my positive stance, having first initiated coverage at 25p ('Follow the smart money', 27 February 2017). Buy.
Lighthouse signals a buying opportunity
Shares in financial services group Lighthouse (LGT:23.6p) are slightly down on my last buy recommendation price of 25p (‘Seeking value opportunities’, 20 November 2018) even though the directors have just confirmed that their company will hit full-year profit expectations for 2018. Please note that I included the shares in my June Alpha Report at 29p ('Alpha Company Research: Simon Thompson looks to profit from the right advice', 6 Jun 2018), after which my target price of 40p was achieved in mid-summer.
Analysts at Edison Investment Research are maintaining their forecasts, which point to Lighthouse raising its 2018 pre-tax profit by 10 per cent to £2.75m to deliver basic earnings per share (EPS) of 2.16p and support a 42 per cent hike in the dividend to 0.6p a share. They also anticipate a closing net cash position of £9.1m, a sum worth 7.2p a share. On this basis, the shares are priced on a cash-adjusted price/earnings (PE) ratio of 7.5 and offer a prospective dividend yield of 2.5 per cent for the 2018 financial year.
Lighthouse provides a comprehensive range of services to businesses and individuals and is retained by 21 trades unions and other affinity groups to advise their combined memberships of over 6m members in the UK. This gives the company a unique and attractive distribution channel for its IFAs to address, demand from which is well supported by the UK’s ageing population, and the fact that an increasing number of people are all taking greater responsibility for their pension and financial assets. So, with a growing pool of affinity group members to target, Edison are maintaining their 2019 forecasts of a 12 per cent rise in pre-tax profit to £3.1m.
I remain a buyer of the shares ahead of Lighthouse’s annual results due to be released in late February. Buy.
Avingtrans on course for profit surge
Aim-traded Avingtrans (AVG:200p), a maker of critical components and services to energy, medical and industrial sectors and a constituent of my market-beating 2017 Bargain Shares portfolio, has issued a reassuring trading update for the six months to end November 2018, and one that highlighted a robust pipeline of prospects for all its operating businesses.
Analysts at house broker N+1 Singer predict that with the benefit of a full 12-month contribution from specialist engineer Hayward Tyler, a supplier of motors and pumps to customers in the nuclear, power generation and oil and gas sectors, and a few small bolt-on acquisitions last year, Avingtrans can deliver 20 per cent higher annual revenues of £95.3m and lift pre-tax profit by three quarters to £4.2m to produce EPS of 10.6p. This partly reflects the benefits of restructuring, but organic growth too as Hayward Tyler landed some major contracts last year, including one to design and make molten test pumps for advanced nuclear facilities in the US, and another to supply high-integrity pumps for the UK’s Astute class submarine programme.
Avingtrans’ other energy businesses are winning orders too. Peterborough-based Peter Brotherhood, a specialist in the design, manufacture and servicing of performance-critical steam turbines, compressors, and combined heat and power systems, won a £5m UK government contract last summer which the directors expect to lead to significant opportunities to tender for further business. In Cumbria, the company is ramping up its lucrative 10-year contract at the Sellafield nuclear power station, worth £47m, to provide 1,100 waste storage containers, highlighting its role in decommissioning work. I expect Avingtrans to win a lucrative follow-on contract when tendering for the next stage (15,000 containers) starts later this year.
Ahead of the first half results on 27 February 2019, and rated on a PE ratio of 15 and offering a prospective dividend yield of 2 per cent for the 2019/20 financial year based on N+1 Singer’s maintained estimates, I believe the 13 per cent pull-back in the share price is overdone since the company posted an earnings beat for the 2018 financial year (‘Avingtrans earnings beat’, 3 October 2018). Buy.
High yielding Record worth buying into
In last week’s column, I outlined why I thought the US dollar could weaken this year and highlighted a number of beneficiaries in the commodity complex (‘A game changer’, 7 January 2019). To that list you can add currency manager Record (REC:31p), the laggard in my market-beating 2018 Bargain Shares portfolio. That’s because international clients with exposure to US dollar denominated assets will be more inclined to hedge off the currency risk if the greenback weakens.
True, analysts at Edison Investment Research predict that Record’s full-year pre-tax profit could dip from £7.3m to £6.7m in the 12 months to end March 2019 to reflect the change in some passive hedging mandates from management fee-only to a lower management fee and a performance fee basis. However, forecasts exclude any new client wins and uncrystallised performance fees, so could prove too conservative. But even if Record only delivers EPS of 2.7p and pays all out of it as dividends as is the policy given that the company has a cash rich balance sheet, then the shares still offer a prospective dividend yield of 8.8 per cent. They also trade on a cash-adjusted forward PE ratio of seven. Buy.
■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.
