Kromek Group – does this loss-making detection products group have an exciting edge?

Based in Sedgefield, in County Durham, this technology group is involved in the development, the manufacturing and sales distribution of technically advanced high-performance radiation detection products.

Kromek Group (LON:KMK) also has operating sites in Huddersfield, and in both Pennsylvania and California over in the US.

Aiming at high-value markets

Currently the group’s specific high-value markets are in medical imaging, civil nuclear detection, security and safety screening.

Selling to 50 countries across the world, the group’s marketplace is truly global – the UK, Asia, Australasia, Europe and North America. The company sells its products by way of distributors, directly to original equipment manufacturers, and by direct sales.

Wide range of customers

The group has a customer base ranging from national governments and regulatory bodies to international airports and research institutes, and from major energy providers to the world’s largest technology and medical equipment groups.

Wide range of products

Its range of radiation detection products are primarily based on the group’s proprietary CZT (cadmium zinc telluride) or scintillator technology which significantly enhances imaging quality.

Airborne bacteria and Covid-19

Additionally, the company is developing technology and products in a new market segment of bio-security for the detection of airborne bacteria and viruses including the dreaded Covid-19.

Its solutions provide high-resolution information on material composition and structure to enable the identification of cancerous tissues and hazardous materials, as well as for the analysis of radioactive materials.

Radiation detection

The company also provides a very wide selection of radiation detectors ranging from handheld rugged gamma ray detectors, thermal neutron detectors, gamma-ray detector spectrometers, and scintillator detectors to voltage to frequency converters.

Medical imaging

In addition, it also offers medical imaging products, including gamma detectors for imaging, bone mineral densitometry detectors, and photon-counting spectral CT. The facility in Pennsylvania has been recently purpose built and designed to be a world-class manufacturing base to produce medical imaging products.

Security range

Furthermore, the company provides security products, such as personal radiation detectors, wearable gamma neutron detectors, networked radiation detectors and static radiation detector, vehicle mounted radiation detectors, radiation mapping drone systems, liquid explosive detection algorithm, and identifier liquid explosive detectors.

The company provides a vertically integrated technology offering to its customers, from radiation detector materials to finished products or detectors, including software, electronics and application specific integrated circuits. It also handles research and development.

Recent funding

Next Monday’s General Meeting is to seek shareholder’s approval for its recent £10m Placing and Open Offer of £3m, involving a total issue of up to 87m new shares @ 15p each.

The net proceeds will be used to de-risk and commercialise bio-security/pathogen detectors and to accelerate the commercialisation of its biological detection technology, while also expanding its sales and marketing efforts for the group’s nuclear detection and medical imaging activities.

Importantly it will be used to strengthen the loss-making group’s balance sheet and to provide it with flexibility to address and capitalise on the current and emerging opportunities.

Broker’s estimates

Analyst Simon Strong, at the group’s brokers Cenkos Securities, is estimating that the current year to end April will see revenues of just £10m (£13.1m), while adjusted losses before tax could well fall from £18.3m last year to just £6.7m this year.

For the coming year he sees a 50% leap in sales to £15m, with losses coming out at £5.3m.

He notes that its margins of 50%, with fixed operating costs, could well mean that for every £1m of revenue it could kick in over £0.5m into EBITDA. He rates the shares as a ‘buy’.

Enlarged equity

The enlarged equity, which is valued at around £82m, includes large holders such as Canaccord Genuity Wealth, Hargreaves Lansdown Stockbrokers and Asset Management, Interactive Brokers, Herald Investments, Premier Miton, Killik & Co, and NFU Mutual Investment Services.

Share price action

In March last year Covid-19 hit the group’s share price, falling to a low of 7p, within a fortnight they had recovered in price to 23.5p, before gradually easing back to 10.5p by early October.

Less than a month ago they had staged a rally back up to 24p.

My view – not an investment but a speculation

This group is certainly in the right market for its products, it is a competitive arena but its technology gives it an edge. With stronger funding it should be able to get out there and win a great deal more business.

I do not rate the shares as ‘an investment’ but instead as ‘a very interesting speculation’.

My Target Price for the shares, which closed at 19p last Friday night, is set at 23.5p.