FY19 set to be another 'break-through' year
Kromek is pioneering digital colour imaging for x- and gamma rays, using cadmium zinc telluride crystals. Key markets include medical imaging, homeland security and nuclear detection.FY18 was pivotal in many ways. Not least, because it was the first time ever EBITDA turned positive (£482k vs -£1,462k) - reflecting record turnover of £11,845k, up 32.1% LFL (LY £8,968k; +37% constant currency) and favourable operational gearing (gross margin 56.4% vs 57.1%). However this is just the start.
In our view, strong double digit growth should continue for the foreseeable future, with FY19 setting up to be another landmark year. This time achieving cashflow neutrality, together with winning a number of new orders with blue chip OEMs and governments across the globe. The greatest demand expected to come from SPECT (single photon emission computed tomography), a $100m addressable market, and nuclear detection (worth >$1bn) on the back of KMK’s best-in-class ‘dirty bomb’ detector, the D3S.
Indeed Kromek is probably the only independent, end-to-end CZT manufacturer with the required design, engineering and technological skills to produce sufficient commercial quantities of the material in the desired timeframes and at the targeted price levels. A key reason too, why today the business has a coveted roster of 11 healthcare clients - across SPECT, bone mineral densitometry (BMD to treat osteoporosis) and gamma probes (used for radio-guided surgery).
Ok, but what was the cashburn? Net cash closed April’18 at a comfortable £7.7m (vs £17.3m), representing an outflow of -£9.6m in the period (split -£4.0m H1 vs -£5.6m H2). The decline was due to working capital (-£6.0m vs -£0.95m LY), -£3.5m of capitalised R&D, capex/IPR (-£0.9m) and forex (-£0.5m), partly offset by £0.9m of tax rebates and £0.5m EBITDA.
Looking ahead, based on our estimated 60%-70% revenue cover, we have bumped up our FY19 EBITDA forecast from £1.40m to £1.66m on sales of £15.0m – in turn lifting the valuation from 37p to 40p/share.
Conservatively, no large-scale D3S US city roll-out has been factored into our numbers until after FY20. Meaning there could be substantial upside, if any such deals are secured (as we suspect they might) in the near term. Plus for benchmarking purposes, at 24p, the stock trades on a current year EV/sales multiple of 3.6x - which is noticeably lower than the average, despite KMK’s faster growth trajectory.
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.
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