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Kromek’s bumper contract momentum

The radiation detection technology company has been winning a raft of contracts, and is funded to continue to do so
July 24, 2019

Sedgefield-based Kromek (KMK:23p), a radiation detection technology company focused on the medical, security screening and nuclear markets, released a sizzling hot set of results just as I was departing for a well-earned break at the start of the month. Cash profit quadrupled to £2m on revenues up 22 per cent to £14.5m in the 12 months to end April 2019, including a storming second half when Kromek delivered cash profit of £2.5m on revenue of £10.8m, a performance that highlights the robust momentum in the business and high operational leverage, too.

Furthermore, the contract momentum shows no sign of abating. Having won contracts worth almost $80m (£64m) in 2018-19, the current order book is estimated at $90m, according to analyst Paul Hill at Equity Development, the visibility from which underpins 80 per cent of Mr Hill’s revenue target of £18.5m for the current financial year to produce a cash profit of £2.7m. There could be upside to these forecasts, too.

Importantly, having moved to a state-of-the-art 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, Kromek is well funded to capitalise on end-market demand for its CZT technology, having raised £19.9m in a placing, at 25p a share, earlier this year ('Kromek equity raise worth backing', 11 February 2019).

For instance, Kromek has signed a five-year contract worth $7.8m (£6.2m) with an existing original equipment manufacturer (OEM) customer to customise its current X-ray imaging systems with CZT technology for the baggage screening market. Another OEM customer has almost doubled its contract with Kromek to $5.8m and divisional orders are set to ramp up further given the heightened terrorism risk, which makes border security critical at ports, airports and international rail terminals.

In the medical imaging industry, Kromek’s CZT technology is being used by 11 OEM customers across single photon emission computed tomography (Spect), bone mineral density (to treat osteoporosis) and gamma probes (used for radio-guided surgery). 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. It’s proving popular, too. Indeed, Kromek landed a massive $58m seven-year contract to supply a customer with CZT detectors in its state-of-the-art medical imaging systems.

The same is true in the nuclear sector as Kromek has been awarded a raft of contracts, including a $2m initial 12-month award from the US Department of Defense to develop a proof-of-concept device for a vehicle-mounted biological threat identifier. It could be extended into a multi-year award for the development of a fully deployable vehicle.

Kromek continues to 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. Bearing this in mind, analysts believe that a number of military and civilian pilot schemes will be upgraded to full roll-outs by US Homeland Security over the next 12 to 24 months. It’s not just in the US as Kromek has just announced £1.6m-worth of international orders for its D3S technology. Expect more deals to follow. It’s worth considering that 84 per cent of Kromek’s sales are non-UK, so could become far more valuable in the event of sterling weakness post Brexit.

So, 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). My financial models point towards a target price of 40p to value the company’s equity at £138m and giving it an enterprise value of £123m after adjusting for net cash of £15.2m on the balance sheet. Buy.

 

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous 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.