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Pivotal year unfolding for Kromek

A Sedgefield-based radiation detection technology company expects first sales of Covid-19 bio-security pathogen detectors by April and a recent takeover in the sector has prompted OEM customers into action.
Pivotal year unfolding for Kromek
  • First sales of Covid-19 bio-security pathogen detectors by April
  • Initial orders with new strategic OEMs could lead to huge orders
  • Bid potential for undervalued medical imaging business

Investors are materially underestimating trading prospects of Kromek (KMK:14.5p) in what could be a pivotal year for the Sedgefield-based radiation detection technology company that is focused on the medical, security screening and nuclear markets.

Firstly, during our results call, chief executive Arnab Basu revealed that he expects first commercial sales by April for Kromek’s bio-security pathogen detectors which sample air and identify the presence of any biological pathogen including Covid-19. The company is working with the NHS and a major transportation group, both sectors being obvious candidates for deployment on a commercial basis.

Secondly, Canon’s recent US$270m (£199m) acquisition of Redlen Technologies, the only independent commercial producer of Cadmium Zinc Telluride (CZT) detectors globally other than Kromek, is material. House broker Cenkos Securities’ read across implies a valuation of £196m (45p a share) on Kromek’s medical imaging business, or more than three times Kromek’s current market capitalisation.

Moreover, by removing one rival from the market, it means that medical imaging OEMs – Phillips and United Imaging, for instance – that are looking to adopt CZT technology but lack in-house production capacity are now far more reliant on Kromek than previously. Basu notes that three new strategic original equipment manufacturers (OEMs) have placed initial orders with Kromek and “we expect a number of contracts to be signed in 2022 as they look for surety of supply”, adding that “more conversations are ongoing”. They could be very large contracts given that one seven-year medical imaging contract signed with an OEM in 2019 is delivering US$58m of revenue to Kromek over the contract term.

Basu also revealed the potential to split out the group’s two distinct business units – chemical, biohazard security, radiation and nuclear (CBRN) activities comprise the other. The fact that the directors have segmented the two operations in the results presentation is telling. The point is that a medical imaging OEM looking for security of CZT supply could be tempted to make a bid for that part of Kromek’s business, which analyst Mike Jeremy at Equity Development values at £225m. He also highlights the undervaluation of the CBRN business, which could generate half of group revenue of £18m in the 2022/23 financial year, and could be worth £54m.

Importantly, with 96 per cent of budgeted annual revenue of £15m covered by orders as well as 60 per cent of the £18m revenue estimate for 2022/23, the long-awaited move into cash profitability is on the cards. Jeremy predicts £0.6m cash profit in the second half to 30 April 2022 to wipe out the £0.6m first-half loss, and is pencilling in cash profit of £0.75m in 2022/23.  

Kromek’s shares have been volatile since my last buy call at 15.75p (‘Backing a tech winner in the fight against Covid-19’, 14 July 2021), but with game-changing orders from medical imaging OEMs possible and the commercial launch of the Covid-19 airborne detector imminent, then I maintain the view the share price could double. Buy.


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