Report

Big game hunting

The healthcare industry has reached a seminal point. Faced with ageing populations, soaring demand and intense political pressure to improve patient outcomes, governments have realised that the only way to cope is to embrace ‘revolutionary’ new technologies. Not just those which deliver incremental improvements, but real ‘step changes’ that generate far superior results from much less resource.
To us, this strategic shift is a ‘no-brainer’, and next generation medical imaging equipment powered by CZT fits the bill. Accelerating the diagnosis & treatment of some of the world’s most common, yet serious conditions - such as cancer, heart disease, dementia, diabetes & osteoporosis. And this morning Kromek announced that it had been awarded a ‘ground-breaking’ $58.1m (minimum) 7 years contract to supply its patented CZT detectors to a leading medical imaging device manufacturer (and existing client) with 1st revenues expected to commence in FY20.
This watershed agreement is significant on numerous counts. Firstly, along with its unique D3S ‘dirty bomb detector’, KMK now has a 2nd monster ‘home-run’ to bolster its near-term pipeline. Next, given this OEM has decided to invest heavily CZT, then today’s news removes any lingering doubt (if there was any) concerning the magnitude of the opportunity. In fact, this secular upgrade cycle is likely to drive KMK’s growth over not just months & years, but probably decades too.
Better still, the RNS could potentially set the stage for a mini ‘gold rush’ across the industry. In one fell swoop, shifting the technology goal-posts and positioning KMK as the front-runner to sell its patented CZT detectors to other medical imaging OEMs. Organisations with whom we suspect discussions are already underway.
Finally from a risk perspective, the announcement should also decrease the notional ‘discount rate’ (ie equity premium) built into investor returns. Not only because we estimate Kromek’s backlog presently hovers at around $100m, but also because future visibility has materially improved.
So, despite (conservatively) not upgrading our projections for this year & next, we have lifted the valuation to 50p/share, reflecting the $58.1m (minimum) contract, higher anticipated growth rates and lower risk profile.
Underlyings
Axon Enterprise, Inc.

Kromek Group

Kromek Group is a developer of radiation detectors based on cadmium zinc telluride, providing detection and characterization capabilities within the medical imaging, nuclear detection and security screening markets. Co. designs, develops and produces x-ray and gamma-ray imaging and radiation detection products.

OSI Systems Inc.

OSI Systems, together with its subsidiaries, is a designer and manufacturer of electronic systems and components for applications. The company sells its products and provides related services in various markets, including homeland security, healthcare, defense and aerospace. The company's operating divisions are: Security, which provides security and inspection systems, security screening solutions and related services; Healthcare, which provides patient monitoring, diagnostic cardiology, and anesthesia delivery and ventilation systems; Optoelectronics and Manufacturing, which provides electronic components and electronic manufacturing services for the Security and Healthcare divisions.

Palo Alto Networks Inc.

Palo Alto Networks provides a platform that allows enterprises, service providers, and government entities to secure their organizations. The company's platform uses a traffic classification engine that identifies network traffic by application, user, and content and provides security across the network, endpoint, and cloud. The company's product, subscription, and support offerings include: firewall appliances and software; and Panorama, which is a centralized security management solution for global control of various firewall appliances and software deployed on an end-customer's network as well as in their instances in public or private cloud environments as a virtual appliance or a physical appliance.

Stemmer Imaging

Stemmer Imaging AG is a Germany-based provider of machine vision technology. The Company's offering includes a complete technical range of products from a variety of manufacturers, such as cameras, lenses, illumination products, machine vision systems, as well as its own custom-made solutions, such as customized cables and protective housings for machine vision cameras. In addition, the Company develops imaging software, Common Vision Blox. The Company's machine vision solutions can be used in industrial automation to ensure quality control. Application areas include automotive, print, packaging, food and pharmaceutical industries, medical engineering and traffic technology, among others. The Company also provides customer support services, offering customized advice, feasibility studies and training, among others.

Thermo Fisher Scientific Inc.

Thermo Fisher Scientific is engaged in serving science. The company's segments include: Life Sciences Solutions, which provides reagents, instruments and consumables used in biological and medical research, discovery and production of new drugs and vaccines as well as diagnosis of disease; Analytical Instruments, which provides instruments, consumables, software and services that are used for a range of applications in the laboratory, on the production line and in the field; and Specialty Diagnostics, which provides diagnostic test kits, reagents, culture media, instruments and associated products for customers in healthcare, clinical, pharmaceutical, industrial, and food safety laboratories.

VARIAN MEDICAL SYSTEMS INC

Varian Medical Systems is a manufacturer of medical devices and software for treating cancer and other medical conditions. The company's segments are: Oncology Systems, which designs, manufactures, sells and services hardware and software products for treating cancer with radiotherapy, and treatments such as fixed field intensity-modulated radiation therapy, image-guided radiation therapy, volumetric modulated arc therapy, stereotactic radiosurgery, stereotactic body radiotherapy and brachytherapy, as well as associated equipment; and Proton Solutions, which develops, designs, manufactures, sells and services products and systems for delivering proton therapy, for the treatment of cancer.

Provider
Equity Development
Equity Development

​Equity Development enables companies to become better understood and supported by investors. Since our launch in 1996 we have consistently focused on helping our clients improve their communication and relationships with both existing and potential shareholders. Our clients have come from a wide variety of sectors and domiciles, are both private and quoted and range in size from micro-cap to $multi-billions. We offer free access to company research notes written by experienced analysts. These notes include detailed forecasts, financial models and a fair value. We host regular Private Investor Forums at which investors have the opportunity to hear company directors present, and to ask questions. These are free to attend. We broadcast live Webinars with company management that include active Q&A. We also make the recordings available online. We arrange face to face meetings between private investors and company management. We are active users of Twitter, commenting daily on company news, share price moves, Directors’ Dealings, Equity Development Research Notes & Events.

Analysts
Paul Hill

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