Kromek's 44% revenue boost underlines why it's a buy

Sedgefield-based Kromek (KMK:5p), a radiation detection technology company focused on the medical imaging and nuclear markets, has delivered a step change in cash profitability in the second half of its financial year to 30 April 2023, a move that looks sustainable.

Buoyed by record performances across both its nuclear and medical imaging segments, which increased their revenue contribution by 38 per cent to £7.4mn and 65 per cent to £7.6mn, respectively, Kromek’s annual revenue surged by 44 per cent to £17.3mn. Moreover, the strong recovery in second half gross margin (59 per cent compared to 40.3 per cent in first half) combined with an improved sales performance delivered second half cash profit of £1.6mn on revenue of £10.5mn, reversing a first half cash loss of £2.6mn on revenue of £6.8mn.

Analysts at both Equity Development and joint house broker FinnCap expect Kromek to deliver a cash profit of £0.9mn on 21 per cent higher revenue of £21mn in the new financial year, forecasts underpinned by structural drivers and an order book that already covers 60 per cent of their revenue estimates.

Structural growth drivers

Kromek is working with nine original equipment manufacturers (OEM) that are looking to develop cadmium zinc telluride (CZT)-based detectors in their advanced computed tomography (CT) and single-photon emission CT (SPECT)-based medical imaging scanners.

CZT detection solutions offer superior sensitivity, higher energy resolution and better imaging performance capabilities that enable the earlier detection of diseases, such as cancer, thereby improving patient outcomes. As the only independent developer and producer of CZT-based detection systems, Kromek’s technology has significant strategic value to OEMs operating in the medical imaging space.

Three months ago, a top tier OEM signed a seven-year collaboration agreement for the supply of CT and SPECT CZT-based detectors in its medical imaging scanners (‘Analysts think this stock will quadruple’, 19 April 2023). Kromek has also signed an agreement with Analogic Corporation, a second-tier supplier, to develop next-generation CZT-based detector solutions for photon counting computed tomography (PCCT) applications in the medical imaging and security sectors. In addition, the order book includes $40mn (£31mn) of contracted revenue over the next five years from Spectrum Dynamics and a $1.4mn initial order placed post period-end by a new Asia-based OEM customer for CZT-based detectors in its SPECT systems.

Interestingly, chief executive Dr Arnab Basu highlights the market growth opportunity for Kromek in China where an ageing population and fast growing middle income population are increasing demand for diagnostic imaging. Last year, the country accounted for around 60 per cent of all new CT imaging systems in 2022.

Current geopolitical instabilities are playing into Kromek’s hands, too, underpinning demand for its dirty bomb’ detectors which protect buildings and critical infrastructure against nuclear threat. Last month the division won a $1.5mn contract in Asia, having won two contracts worth £1.5mn from European customers and $2.8mn orders from US customers in the 2023 financial year. The expansion of Kromek’s distribution agreement with Smiths Detection Inc in the Middle East, Asia and Australia, is another positive step, widening the group’s geographic footprint for its products. The cutting edge technology is also being used to develop and supply government funded biological threat detection systems in both the US and UK.

Balance sheet strengthened

Kromek’s financial position is healthier, too. Importantly, Basu says the group is close to completing an enlarged debt facility with a new funder to replace the existing one with HSBC (expires on 31 August). The balance sheet has also been bolstered by £7.4mn net proceeds from a placing and open offer in May 2023.

It's worth noting that proforma net debt of £0.4mn includes £2.8mn of convertible loan notes, the majority of which are held by existing shareholders and could be converted into equity in early 2024. Equity Development forecasts £3mn cash inflow from operations in the new financial year which will make a major dent on £5.2mn of budgeted capitalised research and development expenditure.

So, although Kromek's share price has drifted since my last article, the investment case remains firmly intact. The potential upside to FinnCap’s 21p to 31p sum-of-the-parts valuation and Equity Development’s 26p fair value makes the shares a buy.