Future ‘break-out’ stocks are like gold dust to investors. The problem of course is spotting them earlier enough to benefit. Well, we think we’ve found one in Kromek, a leading global supplier of cutting-edge radiation detectors.
This morning the firm reported that >$30m of new orders were secured during the 12 months ending April 2016, equivalent to an approx. book to bill ratio of 2.5x. This growth was helped by multiple landmark deals with new and existing blue chip customers, particularly in Nuclear Detection and Medical Imaging - thus providing excellent revenue cover for this year and next. Indeed, we reckon that the 12,000 unit DARPA D3S contract alone could generate $6m of sales in FY17, equating to around 50% of our £8.9m target. 3,500 devices have already been shipped with the remainder scheduled for delivery before April 2017
Better still, there are several other multi-$m orders in medical imaging (Re SPECT and BDM) set for fulfilment this year, on top of normal repeat business, development work for Canberra Industries and likely rising demand for bottle-scanners as the EU rolls out new legislation mandating their use in smaller regional airports. What’s particularly encouraging too in SPECT (Single Photon Emission Computed Tomography), is that GE has recently launched its own CZT based flat-bed scanner, which could prove to be a very positive near-term catalyst in stimulating interest from other large OEMs (eg Philips and Siemens) wishing to launch their own competing products. Likewise management note that in the past, this type of “crucial trigger point” has greatly boosted other medical imaging adoption cycles.
Possible upgrades on the horizon
In fact, when all put together, Kromek now has visibility over the majority of our FY17 top line forecast of £8.9m – meaning that there must also be a decent chance of earnings upgrades as the period progresses.
Granted there is some residue execution risk, albeit with such strong underlying demand for the company’s patented technologies, then this is certainly a quality problem to have. Moreover, as production scales and initial teething issues are ironed out, the shares should respond favourably on the back of (perhaps dramatically) improving performance.
In terms of today’s FY16 figures, turnover at £8.3m was in line with our estimates of £8.4m, and 3% ahead of LY (or +11% excluding LY’s non-recurring exclusivity payment of £0.6m) - driven largely by product sales up 41% YoY, representing 65% of the total.
Adjusted EBITDA, however, fell to a wider £2.4m loss (vs -£1.6m LY), reflecting £3.2m (£2.7m LY) of R&D expense (or 38% sales) and a different product mix which fed through into lower gross margins at 53% (69% LY). Nonetheless, it is vitally important that Kromek continues to invest in new technology to retain its preeminent position in this rapidly expanding and science-rich industry.