Kromek Group;8th January 2014; Interim results

20th Dec '13 by johnrosier

9 comments 9183 reads

Kromek Group (KMK.L Mkt Cap; £75, 70p and 1.0% of JIC)

I attended a presentation by three very different companies at Equity Development recently. There was one which really caught my interest and I have today bought a holding for the JIC Portfolio. Kromek was formed in 2003 and is a spin out from Durham University. It uses proprietary Cadmium Zinc Telluride (CZT) detectors to generate high definition colour X-ray images. Its products are aimed at three principal markets; medical imaging, security screening and nuclear detection, all of which have strong growth drivers. It operates out of four sites in the UK, US and Germany and provides its subsystems to original equipment manufacturers (OEM) as well as manufacturing Kromek branded end user products. It has over 180 patents in place.

Starting with security screening: Legislation has been passed so that from January 31st European airports must allow transit passengers to carry liquids on board, in over 100ml bottles. Kromek’s “identifier” is one of only three devices approved as meeting the standards set by the EU. This is the first phase in a relaxation of the current restrictions on passengers carrying liquids on board, leading to a total relaxation when the final phase is implemented in 2016. The Company estimates that the market is worth around $150m over the next four years (6000 machines at around $25,000 each). It believes the total security screening market is worth $1.35bn.

Medical imaging: the second huge market for CZT is medical imaging where the use of its technology can not only lower the dose of harmful radiation being administered but also the image is enhanced considerably making a correct diagnosis easier. It is working with the largest medical equipment manufacturers (GE, Siemens, Toshiba and Philips) in four principal areas; CT scanning, SPECT, Bone Mineral Densitometry and Gamma Probe. It reckons that 24,000 machines are sold annually and at a $200,000 contribution to Kromek, a 10% market share would be huge. On top of that there is an additional market for retro fitting existing machines. There was an impressive photo in the presentation of a breast cancer tumour that was missed using traditional MRI but which stands out clearly using CZT technology. The total market is estimated at $8.7bn.

The final area is nuclear detection, especially in the decommissioning market. The market size is estimated at $2.3bn and the main driver…

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BigAl

21st Dec '13

I have just read the report on Kromek. It is identical -- word for word -- to that issued by Paul Scott. So I assume John Rosier and Paul Scott are the same person. As Paul Scott has recently shown to be lacking in research depth regarding some companies, I now assume that John Rosier also lacks depth in his research. Nevertheless, having said that, he does a good job in highlighting interesting smallcap companies for us all to do our own research. So, thanks for highlighting Kromek -- a very promising company although grossly overpriced at present.

johnrosier

BigAl, I can assure you I am not the same person as Paul Scott and have not read any report by him on Kromek. I guess I should take your posting as a compliment as you say I do a good job at highlighting interesting small cap companies. I would certainly agree that one should DYOR and not follow blindly! I did say in my report it wasn't cheap but if it meets, or even exceeds expectations, it becomes cheap quite quickly. I am anticipating that January's interim results will lead to upgrades but I could be wrong so DYOR.

garbetklb

22nd Dec '13

BigAl

As I'm considering investing in Kromek, I was interested to see your post - it would have been great if you had felt able to explain what you feel an appropriate valuation to be and/or explain your "grossly overvalued" comment.. I read Paul's blog each morning and couldn't recall Kromek being mentioned - nor can I find his article; perhaps you could post a link?

Perhaps you could also expand on your statement "As Paul Scott has recently shown to be lacking in research depth regarding some companies" as it's a bit of a blanket statement & it's reasonable to expect such statements to be supported with what you believe to be examples.

Personally I find Paul & John to be good & interesting reads. Paul, especially, goes out of his way to put his reports in context and to indicate where his views are first impressions, well researched or somewhere inbetween. It's very disappointing that, within 7 minutes of creating your account, you feel it appropriate to slag off 2 longstanding members without any backing arguments, examples or links.

Garbetklb

8th Jan '14

Kromek (79p and 1.1% of JIC Portfolio) Interim results for the 6 months ending 31st October 2013 show sales of £2.372m up from just £710,000 the previous year. At 31st October it had net cash of £9.96m benefiting from its capital raising when it was admitted to AIM in October. I wrote the Company up in some detail when I bought the holding in December and as such I do not think that there are any particular surprises in today’s announcement. It describes the progress it is making in its three key sectors of Medical Imaging, Security Screening and Nuclear Detection. Security Screening has some momentum with it winning further contracts for bottle scanners since the period end, ahead of the partial lifting of the European ban on the carriage of liquids on board aircraft by 31st January. Within Medical Imaging, since 31st October it has won a further $990k contract from a medical imaging OEM on top of the two year $5.3m development program in the medical CT market with a top four OEM in the first half.

Conclusion: So far the Company seems to be delivering as promised but I must emphasise that it is still early days in it commercialising its products and the rate of sales growth will be watched eagerly by the market. When I bought the holding I said it was a “blue sky” story and as such only bought a 1% holding. It has got off to a good start, up 12% on my purchase price and received a boost from being one of Panmure Gordon’s small and mid-cap picks for 2014. Happy Holder!

BrianGeee

John, Equity Development's revenue targets for the current and next year are £11.3m and £22.0m. Panmure's targets are £11.5m and £23.6m.

I really like the company, people and product, but these just seem like fantasy world numbers. Do you have any idea how these correlate with the £8m booked in H1 that was mentioned at the ED presentation, and you've mentioned in your last para above? I feel there's maybe some misunderstanding related to financial terminology, and perhaps some serious issue with managing investor expectations.

I should possibly also say that a small group of us visited Kromek at their impressive Sedgefield facility shortly after the ED presentation. I think we much better understand their technology, and can see that it's very likely the way certain types of x and gamma ray detection is going to happen in the future. However, while operations are gearing up quickly, this doesn't look like a company that's going to come close to meeting those revenue predictions organically. They seem to be doing a good job of building the business, but nowhere near the rate needed to hit those numbers. So, you have to wonder if there will be near term acquisitions. Even if that was the case, it would be unlikely to fall within the current year.

Unless someone can point out where the revenue will be generated, I can't help but feel there will be some pretty hefty broker downgrades on the way to the figures generated at the time of the AIM listing.

9th Jan '14

Hi Brian, I'm working my way down my portfolio reviewing all my holdings; as it is the smallest holding it will be the last but I should get there tomorrow so thanks for the question. If I can't answer it satisfactorily then maybe one to take profits in! I'll do my best. John

I'm not normally one for early stage tech companies, but this one ticks a lot of the boxes. I just think expectations are set too high, and it will be cash-burning and loss-making for longer than currently indicated. I previously worked for an AIM listed tech company, where expectations were set too high (aren't they always :-) ), which resulted in excessive pressure on staff to meet very challenging goals, demotivation, and investor disappointment. I wouldn't like to see the same happen here, but I understand the difficulty of managing investor expectations, while conscious of the possible need to raise further capital from the market.
I'll be interested if you get anywhere with trying to estimated the breakdown of current and next year's revenues. That and cash-burn rate are probably key on the financial side.

Sully8786

28th Mar '14

Well, it looks like expectations were 'significantly' optimistic. I think over the long term we'll see this company do well but I expect a bumpy ride.

Best,

Sully.

You were right. Too optimistic!

Only 1% of portfolio and smallest holding, reflecting the risks.

Have sold first thing. Cut and move on!

Kromek Group;8th January 2014; Interim results

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Johnrosier

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