Kromek Groupwww.kromek.com TICKER: KMK EXCHANGE: AIM
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.
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 £14.5m (vs £11.8m LY), alongside a 4-fold increase in EBITDA (pre SBPs) to £2.0m (£0.5m). Better still momentum accelerated throughout the period, with H2’19 EBITDA coming in at £2.5m (margin 23.3%) on sales of £10.8m (£7.0m LY).
Sure the blow-out H2 numbers contributed towards a temporary build-up of ‘trade debtors & other receivables’ at yearend – mostly attributable to ‘Amounts Recoverable On Contracts’. 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 firm’s £15.2m of net cash as at April’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 ‘hi-tech disruptive’ 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."
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.
Kromek is pioneering digital colour imaging for x- and gamma rays, using cadmium zinc telluride crystals. Key markets include medical imaging security screening, and nuclear detection.
As so often occurs when commercialising 'break-through' technologies, adoption of the products can take longer than originally expected due to events sometimes totally outside of an organisation's control. This has been the case for Kromek in H2 with the company announcing this morning that turnover will be "significantly below current market expectations".
We estimate (as a worst case) that up to £3m of deliveries could slip into FY15, on top of a £2.5m shortfall in new orders. Consequently we have cut our FY14 turnover, EBITDA and cash forecasts to £5.8m (-49%), -£2.5m (from +£1.3m) and £6.0m (from £10.0m) respectively. Going forward, the lower H2 run-rate also feeds through into FY15 (again worst case scenario) and so our target price falls from 100p to 52p/share.
The proposition remains robust and there were significant positives from the trading update regarding commercial progress and the order pipeline. Importantly, the group is fully funded (est. April '14 net cash of £6m) to a point well beyond when we anticipate it will become cashflow positive.