Kromek listed on the AIM market in October, 2013 and is a UK company pioneering digital colour imaging for x-rays using cadmium zinc telluride crystals.
Revolutionary new pathogen detector
Many of the world’s best and most important products (eg Space exploration, nuclear medicine/power & the internet) were originally invented by the military. It’s happened again – but this time to combat airborne pathogens like Ebola, SARS/MERS and all manner of other biological nasties doing the rounds.
In December 2018, Kromek was awarded a $2.0m contract by DARPA (research arm of US Dept. of Defense) to develop a vehicle-mounted bio-threat detector. The idea being that this should be able to rapidly identify (within 1 hour) any dangerous germ that might have been released into the environment, say by terrorist groups, organised criminals &/or rogue states.
18 months on, Kromek has come up trumps. In fact once finished, using state-of-the-art RNA/DNA sequencing, the solution will be able to continuously monitor & collect airborne microbes, which are condensed into single droplets of water. The samples are then genetically coded, with results available in <60 minutes. Not only detailing exactly what families of viruses & bacteria are present, but also which specific strain or mutation.
Long term this could potentially revolutionise how mankind deals with any deadly pathogen, albeit right now Kromek’s smaller civilian version is not yet ready for deployment in an urban setting.
However, DARPA are sufficiently confident of the project’s primary goal being reached that it has awarded a new $5.2m extension to the initial $2m agreement. With the objective of having a fully operational system by June 2021, or earlier.
This new device could materially upgrade our (unpublished) expectations for FY22 & beyond. At 20.5p, the shares trade on a 4.5x EV/sales multiple, which appears exceptional value for risk tolerant investors. Particularly for an IPR-rich business, sporting disruptive technology and addressing high growth multi-billion dollar markets.
COVID-19 impacts short-term outlook
Operating theatres have been converted into ICUs and non-critical procedures understandably postponed to free up resource for COVID-19 patients: so it was no great surprise either to hear today that part of Kromek’s scheduled deliveries for H2’20 have also been pushed to the right - exacerbated by some near-term supply chain issues (eg sub-contractors, site access).
Despite trading well up to February, FY20 revenues are now expected to come in at £14.5m (£18.5m ED Est, £14.5m LY). Delivering a breakeven adjusted EBITDA (£2.0m ED, £0.5m LY), with April closing net cash of £5.0m (£9.2m ED, £7.9m LY) & gross funds of £10.0m.
The Group also now has two substantial coronavirus opportunities. It announced a fortnight ago that it would soon be manufacturing ventilators under license from Metran Co. Ltd. Japan’s leading such OEM and is planning to produce at least 2,000 of these much needed units by end July 2020.
And in December 2018 Kromek was awarded a $2.0m contract by DARPA (research arm of US Dept. of Defense) to develop a ground-breaking vehicle-mounted biological-threat detector. The project is well advanced and we understand the same 1st-of-its-kind science can also accurately & consistently recognise COVID-19.
We think their financial liquidity, augmented by £3m of annualised cost savings should provide sufficient financial ballast for the group to weather this temporary soft patch. As already shown in the fight vs Covid-19, where there is disruption, there is also opportunity
On the road towards mainstream adoption
3 more D3S contract wins totalling £1.6m
Rare ‘hi-growth disrupter’ at modest price
Finding truly world class disruptive companies trading at attractive discounts to their intrinsic worth is the nirvana of most GARP investors. Particularly where these stocks address multi $bn markets, possess patented technology, enjoy wide economic moats and are expanding organically at double digit rates.
Enter radiation detection specialist Kromek, which today reported FY19 turnover up 22.6% LFL to Â£14.5m (vs Â£11.8m LY), alongside a 4-fold increase in EBITDA (pre SBPs) to Â£2.0m (Â£0.5m). Better still momentum accelerated throughout the period, with H2â€™19 EBITDA coming in at Â£2.5m (margin 23.3%) on sales of Â£10.8m (Â£7.0m LY).
Sure the blow-out H2 numbers contributed towards a temporary build-up of â€˜trade debtors & other receivablesâ€™ at yearend â€“ mostly attributable to â€˜Amounts Recoverable On Contractsâ€™. Albeit the Board anticipate these AROC products will be shipped, invoiced and converted into cash over the next 6 to 18 months. Producing a rich source of future capital for strategic expansion opportunities, on top of the firmâ€™s Â£15.2m of net cash as at Aprilâ€™19.
In terms of the numbers, we make no change to our forecasts, and reiterate the 35p/share valuation, underpinned by almost 80% FY20 revenue cover. We believe the stock trades at an unjustified discount to other â€˜hi-tech disruptiveâ€™ peers across most metrics. Plus, if the company can secure any new major D3S deployments (say covering cities, military sites, border regions, etc), then this would materially enhance our numbers.
CEO Arnab Basu, adding "This was a milestone year as we delivered on all of our objectives, including our key target of growing adjusted EBITDA. Looking ahead, we entered the 2019/20 fiscal year in a stronger position than ever before. The momentum of new contract wins has continued, providing us with greater visibility over revenue. As a result, we are confident of delivering growth for full year 2019/20, in line with market expectations."Download Now Missing Out Get our research first
Trading in line with expectations
£21m to fund unprecedented demand
Big game hunting
Could save 100ks of lives and £bns globally
Kromek is pioneering digital colour imaging for x- and gamma rays, using cadmium zinc telluride (CZT) crystals. Key markets include medical imaging, homeland/security screening and nuclear detection. Headquartered in Sedgefield (UK), Kromek has c.109 employees, of which approx. 88 are in R&D, with a 3 further sites in California, Pittsburgh and Germany. The firm has filed/registered >270 patents.
Amid all the BREXIT hullabaloo, it is easy to forget that the government only last week committed another £20.5bn to the NHS – aiming to save a further 500,000 lives by 2029. Central to the plan is increasing the availability of next generation imaging equipment in hospitals (eg X-ray, BDM, SPECT, CT & MRI) in order to accelerate the diagnosis & treatment of serious illnesses (eg cancer, heart disease, dementia & osteoporosis).
It seems the only affordable solution is to combine cutting edge graphics (re Kromek’s CZT detectors) with Artificial Intelligence – ie to far more accurately and quickly identify such conditions at lower unit costs. The good news is that we are almost there, with KMK’s Healthcare division predicted to jump c.50% LFL in FY19, delivering approx. 60% (or £9m) of our targeted revenues (£15m). Here, the business has already won a slew of contracts for Gamma probes, BDM & SPECT - supported by a whole body of positive clinical data.
Some investors might be mildly queasy by the ‘headline’ 23% fall in H1 turnover, coming in at £3.7m vs £4.8m LY – and leaving £11.3m for H2. We recognise this concern, together with the associated 25:75 weighting. On the other hand, KMK is a small rapidly expanding business commercialising disruptive technology - so this type of bump along the road should not be too surprising. Big picture, we are far more focused on the long-term opportunity, especially with regards to the adoption of CZT within numerous different verticals. Not solely medical, but also homeland/airport security (eg $7.8m baggage screening contract won in Nov’18) and nuclear detection ($2m biological device detector – Dec’18).
Bearing all this in mind, and in light of the 86% and 72% of revenue cover for this year and next, we have held our projections intact, and reiterate the 40p/share valuation. Nevertheless we do accept the greater execution risk, reflecting the significant step up in H2 production and volumes. Conversely, no large-scale D3S US city roll-out has been factored into our numbers either, until after FY20. Meaning there could be substantial upside if any such deals were to be secured, say over the next 12-24 months. Finally in terms of valuation – at 27p, the stock trades on a CY EV/turnover multiple of 4.6x - which is in line with peers, but does not reflect the much faster growth trajectory.
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