Sedgefield-based Kromek (KMK:20p), a radiation detection technology company focused on the medical, security screening and nuclear markets, has issued a bullish trading update alongside its half-year results.
The second-half weighting resulted in a flat cash loss of £0.6m on record revenue of £5.3m in the six months to the end of October 2019, but of far more importance is news that 90 per cent of analysts’ full-year revenue forecasts of £18.5m, up from £14.5m in 2018/19, is already secured. This not only underpins expectations of Kromek reporting second-half cash profit of £3.3m on revenue of £13.3m, but highlights the operational leverage of the business, as a higher proportion of incremental gross margin is converted into cash profit given the company’s relatively high fixed cost base.
The contract momentum shows no sign of abating. Having won contracts worth $100m (£76m) in the past three years, the order book is estimated at $90m, according to analyst Paul Hill at Equity Development. The move to a state-of-the-art medical-grade facility in Pittsburgh, and the seven-fold expansion of production capacity at its Sedgefield plant, means that Kromek has the capability to materially ramp up output as the order book grows. It’s easy to see why its cutting edge patented technology is proving popular.
In the medical imaging industry, Kromek’s cadmium zinc telluride (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). For instance, Kromek has now commenced delivering its CZT detectors for a customer’s state-of-the-art medical imaging systems, having won the $58m seven-year contract earlier this year. There are many other contracts, too.
In the nuclear sector, Kromek has been awarded a raft of government contracts for 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. Given the heightened global terrorism risk, which makes border security critical at ports, airports and international rail terminals, demand can only increase. Indeed, chief executive Dr Arnab Basu says the US Homeland Security, a client of Kromek, now has public tenders out for 140,000 of these detectors. He also expects a current European government contract to be expanded significantly as the D3S detectors are rolled out across the country, city by city.
The same is true in the security screening market as OEMs and government customers look to upgrade their dated X-ray imaging systems with high-performance CZT technology for the baggage screening market. Kromek has four OEM customers, one of which achieved the highest level of European liquid explosive detection certification for its cabin baggage scanner based on Kromek software and detectors, thus enabling the commercial deployment of the product. Another contract with a US client has been expanded by 90 per cent.
Kromek’s share price hit a high of 39p after I initiated coverage at 25p ('Follow the smart money', 27 February 2017), but has fallen below my entry point since the end of September – perhaps the absence of news flow led to some [unwarranted] nervousness amongst investors. However, the bullish trading update should put any concerns to rest. Worth noting, too, is the positive divergence on the charts as the 14-day relative strength indicator (RSI) failed to confirm the series of lows in the oversold shares, suggesting a bottom is in place. Strong buy.
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