Covid-19 airborne threat detection profit opportunity

Dr Arnab Basu, chief executive of Kromek (KMK:13.75p), a Sedgefield-based radiation detection technology company focused on the medical, security screening and nuclear markets, was in bullish mood during our interim results call. He has every reason to be as Kromek’s business is rebounding strongly following last year’s lockdowns which led to delays in fulfilling contracts and resulted in a small interim cash loss of £0.9m.

For instance, deliveries on a seven-year Original Equipment Manufacturer (OEM) contract worth US$58m (£43m) to provide its cutting edge CZT detectors and electronics in state-of-the-art medical imaging detectors are being ramped up to “millions of dollars” of revenue as shipments return to the contract delivery schedule.

Kromek has also received its first commercial order from a security screening customer whose next generation scanner, based on Kromek’s technologies, achieved the highest level of European liquid detective certification for cabin baggage. Furthermore, Kromek is completing a two-year $1.6m development project funded by the US Department of Homeland Security for a CZT detector platform which Dr Basu expects to be commercial adopted and integrated in multiple commercial baggage screening products.

Further contract wins include an initial $0.66m order (ahead of a likely multi-year contract) from a US-based OEM with a global industrial customer base that is incorporating Kromek’s screening technology into its customers’ systems to identify contaminations during the production process. In fact, Dr Basu revealed that procurement and tender activity is “higher than at any time in the past three to four years”.

Investors are rightly getting excited by Kromek’s ground breaking prototype to sample air and identify the presence of any biological pathogen – including Covid-19 or any mutant version – that will be piloted in UK airports, hospitals and the retail sector in the coming months. It is based on Kromek’s work in developing a mobile bio-security system capable of detecting airborne pathogens for an agency of the US Department of Defence. The detector is incredibly accurate, giving a false alarm in just one in 800,000 tests.

Knowing a carrier is infected with a disease before they infect other individuals is key to halting the onset of an outbreak and will be critical in helping the world return to some form of normality even after the vaccine programme is rolled out. Other obvious non-military applications include use in sports arenas, theme parks, schools, offices and cruise ships. The fact that UK government agency Innovate UK is funding a £1.25m programme to customise Kromek’s biological threat detection solution is a strong validation of the technology. Expect commercial roll-out later this year.

The potential profit windfall is simply not priced in, nor is the likelihood of Kromek returning to cash profitability in the 2021/22 financial year. Analyst Paul Hill at Equity Development values the annual global market for the biological threat detection devices at £500m and believes that Kromek could win a 20 per cent share on a 25 per cent profit margin, implying operating profit of £25m. Kromek only has a £45m market capitalisation. Moreover, with its working capital normalising, a £0.9m Covid-19 Paycheck loan set to be written off by the US Government, and a R&D tax credit of £1m due, then current net debt of £1.9m overstates the true position.

In addition, the company should be a major beneficiary of the UK Government’s recently announced £329m five-year nuclear detection budget. Not only does Kromek have a robust product offering in key areas of border control and terrorism threat detection – its dirty bomb detectors are now used in 25 countries, for instance – but post-Brexit, Kromek is only one of two UK companies offering this type of radiation technology.

The shares have rallied from 8p to 13.75p since my last buy advice at the annual results (‘Tech winner in the fight against Covid-19’, 7 October 2020), and could double again as investors cotton onto the scale of the profit opportunity on offer. Strong buy.

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