- Order book covers 75 per cent of revenue estimates for 2021/22 financial year.
- Successful pilot of Covid-19 pathogen detectors in UK airports, schools and retail outlets ahead of commercial roll-out.
- Cutting edge CZT detectors being deployed in medical imaging scanners in multiple countries.
- £20m worth of nuclear sector revenue in active procurement that could be delivered this year.
Kromek (KMK:15.75p), a Sedgefield-based radiation detection technology company focused on the medical, security screening and nuclear markets, has announced a raft of contract wins worth over £0.75m alongside annual results. The directors also revealed that the current order book covers 75 per cent of analysts’ revenue estimates for the 2021/22 financial year which point towards turnover rising from £10.4m to £15m.
Moreover, house broker Cenkos Securities expects gross margins to rise from 48 to 52 per cent, so with the benefit of a relatively fixed cost base last year’s Covid-19 impacted cash loss of £1.7m is forecast to produce a small adjusted cash profit. Paul Hill of Equity Development has similar estimates. It’s worth pointing out that forecasts don’t factor in any contribution from Kromek’s bio-security pathogen detectors which sample air and identify the presence of any biological pathogen including Covid-19.
The technology 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 (DARPA). In the past month, DAPRA awarded Kromek a follow-on US$6m (£4.2m) contract to deliver an automated and fully mobile airborne pathogen detection system, and the company has been awarded a £349,000 contract from the UK Ministry of Defence. Chief executive Arnab Basu (pictured) says his company is in “serious discussions with multiple governments” and notes that “its unique set of IP isn’t reflected in the current valuation.” I concur, so much so that with a raft of positive news flow set to announced on multiple fronts in the coming months I expect the share price to re-rate markedly.
Firing on all cyclinders
In the civil space, and funded by a £1.25m Innovate UK grant, Kromek’s Covid-19 pathogen detectors are being piloted successfully in UK airports, hospitals and the retail sector ahead of commercial roll-out this year. A false alarm rate of only one in 800,000 tests means that detection levels are comparable with gold standard PCR tests. To quantify the size of the opportunity, 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.
During our results call Basu also revealed that Kromek is scaling up its US$58m seven-year contract with an Original Equipment Manufacturing (OEM) customer that is installing the company’s cutting edge CZT detectors in medical imaging scanners in multiple countries. The contract supports a third of analysts’ full-year revenue estimates. More awards should be forthcoming given that an increasing number of OEMs are deploying ‘best in class’ CZT detectors in scanners to more accurately diagnose and treat patients with cancer, Parkinson’s Disease, cardiovascular illnesses and osteoporosis.
The company should be a beneficiary of the UK Government’s £329m five-year nuclear detection budget, too, given that Kromek’s product offering covers key areas of border control and terrorism threat detection – its dirty bomb detectors are now deployed in 26 countries – and the UK Government is “localising supply chains.” Interestingly, Basu revealed that Kromek has £20m worth of revenue in active procurement in the nuclear sector that “could be delivered this year”, highlighting the marked increase in activity being seen across major international markets.
In security screening, Kromek has received its first commercial order, and subsequent follow up orders, from an OEM customer whose next-generation scanner, based on Kromek technologies, achieved the highest level of European liquid explosive detection certification for cabin baggage. In addition, the company has received orders for CZT modules to be designed into an advanced baggage screening system of a new US-based customer.
Importantly, Kromek has the funding to support delivery of further contract wins following the £13m equity raise at 15p a share in February 2021. Closing net cash of £7.4m is effectively £8.8m as post financial year-end the US Government has written off US$1m Covid-19 Paycheck loan and a further US$0.8m loan is expected to be forgiven, too.
I last suggested buying the shares at 16.75p (‘Small-cap bargain hunt’, 14 February 2021), and feel that the value of the company's IP and scale of the profit opportunity on offer from Kromek’s Covid-19 pathogen detectors – expect some exciting news within the next few months – warrant a return to April’s highs (28p), and well beyond. Strong buy.
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