Small Cap Value Report (Part 1 - 25 Jan 2017) - KMK, SMWH, RTN

Wednesday, Jan 25 2017 by

Good morning,

In case anyone missed it, Paul has heroically covered a large bunch of stocks I didn't get around to yesterday, in a Part 2 report.

It's available at this link. Stocks covered: XLM, LAKE, MUR, KLBT, AVO, PRSM.

Paul is also writing a Part 2 report today, covering LOOP, TAP, KOOB and STAF. It's available here.

Kromek (LON:KMK)

Share price: 21p (+6%)
No. shares: 153m
Market cap: £32m

Firm Placing and Open Offer to Raise up to £21 million

This very large fundraising (vs. the market cap) comes as something of a surprise to me - bigger than I would have expected.

The company had £3.8 million in cash and some spare capacity in a borrowing facility, at the date of its interims (last October). When this was reported, I said the company could potentially get to profitability before raising fresh funds - but the risk of a further dilution was enough to keep me away.

100 million new shares are conditionally being placed at 20p, and a further 5 million will be available through the open offer (if the proposals are accepted).

Admirably, the placing is taking place at no discount to the middle market price of yesterday evening.


An interesting rationale - it needs financial strength to boost its perception among its customers, apparently. Cash reserves are needed "to provide comfort to third parties".

The Directors believe that a perceived lack of balance sheet strength has, at times, weakened the Group's position when negotiating contracts with OEM and government bodies. Whilst these organisations are increasingly interested in pursuing CZT as a new technology, when the Group has historically engaged in commercial discussions with these organisations concerns have been expressed about the financial strength of the Group and its ability to supply significant quantities of CZT detectors over an extended period of time. The Directors believe these concerns have delayed or prevented the Group from entering into significant supply contracts with potential new and existing customers.

Use of proceeds

£17 million for the balance sheet strength required as above, and £3 million for general purposes.

Current Trading

in line with expectations.

My opinion

I think this is great news for the company, and it's nice that shareholders have been so supportive, but is there value at the current share price? At the current share price, the market…

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All my own views. I am not regulated by the FSA. No advice.

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Kromek Group plc is a radiation detection technology company. The Company develops radiation detectors based on cadmium zinc telluride. The Company's segments are UK Operations and US Operations. The Company designs, develops and produces x-ray and gamma ray imaging and radiation detection products for the medical, security screening and nuclear markets. The Company's solutions provide information on material composition and structure to enable the identification of cancerous tissues and hazardous materials (including explosives), and the analysis of radioactive materials. Its nuclear products include CPG, GR1-Gamma Ray Spectrometer, GR1A, SIGMA, TN15, RayMon10, Quant Air and RENA-Mini Development Platform. It offers detectors and subcomponents for original equipment manufacturer (OEM) customers in the medical imaging market, including computed tomography (CT), single photon emission computed tomography (SPECT), positron emission tomography (PET) and bone mineral densitometry. more »

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WH Smith PLC is a United Kingdom-based retailer in convenience, books and news for travelling customers. The Company is a high street stationer, bookseller and newsagent. The Company operates through two segments: High Street and Travel. The Company's Travel business sells its products to cater for people on the move or in need of a convenience offer. The Travel business operates from approximately 768 units mainly in airports, railway stations, motorway service areas and hospitals. The High Street business sells a range of Stationery (including greetings cards, general stationery, art and craft, and gifting), News and Impulse (including newspapers, magazines, confectionery and drinks) and Books. The High Street business operates from approximately 612 High Street stores. The Company's digital business operates through two Websites: and It also operates across Australia, South East Asia, India and the Middle East. more »

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The Restaurant Group plc is a United Kingdom-based company, which operates over 500 restaurants and pub restaurants. The Company operates through operating restaurants segment. Its portfolio covers a range of categories, including table service, counter service, sandwich shops, pubs and bars. The Company's principal trading brands include Frankie & Benny's, Chiquito and Coast to Coast. The Company's Frankie & Benny's brand offers classic American and Italian style food and drinks. The Chiquito menu offers a range of authentic Mexican and Tex-Mex dishes. The Coast to Coast offers classic American food, such as double burgers, stone-baked calzones, distinctive steaks, amazing seafood dishes and South-West American specials. The Company also operates a concessions business, which trades principally at the United Kingdom airports. The Company's concessions business develops partnerships to deliver catering solutions that meet the needs of its clients and clients' customers. more »

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  Is Kromek fundamentally strong or weak? Find out More »

16 Comments on this Article show/hide all

ithomson1 25th Jan 1 of 16

Hi Graham, great work on all your recent updates, I find them very insightful.

I was wondering if you might be commenting on this mornings Trading Update from Koovs? Perhaps this is something Paul might do. I can understand why it might not be worth mentioning though, it's a short RNS and not particularly useful at all because it only really shows sales growth. Not much point when they've been losing money on Gross Margin alone.

I'm not a holder of shares in Koovs, as things stand I think if I was given the choice I'd rather lose my eyes than hold shares in Koovs. But I am interested to know how they might plan to start heading towards profitability, it looks like it's going to be a beast of a task.

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Graham N 25th Jan 2 of 16

In reply to ithomson1, post #1

Hi there, thanks for the comments - I think Paul will be covering Koovs today in a separate report. Stay tuned.

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bestace 25th Jan 3 of 16

The Kromek (LON:KMK) share price has been falling of late, so it's possible the 'no discount' on the placing is a bit of a mirage.

Sounds like £17m of cash is going to be sat on the balance sheet doing absolutely nothing other than being there for the appearance of balance sheet strength.

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tads 25th Jan 4 of 16

KMK is a barge pole case.

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Benson 25th Jan 5 of 16

Do not claim to know anything at all about Kromet but from your comments not a share to waste time on
Any chance of running over 1PM? results

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tabhair 25th Jan 6 of 16

If you're looking for something to do, Graham, maybe cover Restaurant (LON:RTN) ?

As an aside, it's also interesting to see Sterling starting to wind back in losses it made against the Dollar in the last 6 months.

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JohnEustace 25th Jan 7 of 16

Re WH Smith (LON:SMWH) there's a bear case to be put that they are under investing and milking the brand - not things that would make me happy to hold long term.

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Graham N 25th Jan 8 of 16

In reply to tabhair, post #6

Hi tabhair, I was already planning to have a look at it. Cheers!

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TerryQ 25th Jan 9 of 16

I've looked at RTN a few times and, like you, been tempted. What's held me back is the sheer number of competitors. Where I live Frankie & Benny's had only a few competitors and they also had their Mexican themed chain (can't remember the name but recently closed when they scaled back). Recently there must be at least 10-15 new restaurants opened up all with different menus from Jamaican through to posh french and everything in between. Not sure why the locals would go back to F&Bs unless they (a) offer a very cheap menu (margins !) or (b) differentiate in some extraordinary way. Obviously, just my opinion.

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Aislabie 25th Jan 10 of 16

I appear to be alone in regarding Kromek KMK as a company with a very high potential although I recognise that for now it is in my blue sky bucket.
The nuclear security aspect seems to give it a very important role with governments and I can well see that if you are placing a large order for a critical product you want to know that the company has the horsepower to see it through .
I am encouraged that the institutions who talk most closely to them are taking part in a very large no discount placing (and happy that there is an offer for private shareholders too). The point is taken that at the current price the discount is baked in but that mainly underlines that it should not be at this price.
So we have a "Blue Sky" company with 2018 sales forecast to grow 50%, EBITDA breakeven next year, half its market cap in cash, and five Directors plus Miton adding to their holdings. Small companies can always get derailed but this seems as fair a blue sky offer as currently on offer.

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bsharman 25th Jan 11 of 16

In reply to Aislabie, post #10

Don't worry you are not alone Aislabie - and Miton seem to agree with us!

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mikebianchi 25th Jan 12 of 16

Well I'm nursing a loss at the moment but so are those Directors, ouch. I was hopeful that they would perhaps see a slight recovery in turnover, alas these interims are about as dire as they go, surely the bottom (ish), there is plenty of choice, perhaps a buyout at some time.

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sharw 25th Jan 13 of 16

Graham - " tempted to do something I don't normally do - take a small starter position in this stock". If you do it is on the grounds that the new management are capable of turning this around. There are some interesting details from Liberum quoted here this morning in which they demonstrate how the woes stemmed initially from a catastrophic menu change in August 2015. The staggering thing is how the previous management failed to pick this up until it was too late. The new management have a three point "transformation programme" but say that they "anticipate momentum improving towards the end of this transitional year as our initiatives start to take effect" (the old one about taking time to turn round an oil tanker).

It will also take time for the market to regain confidence just as, with the benefit of hindsight, we can see that it had too much in 2015 when, post the results for 2014 (EPS up 7%), it was on a p/e between 20 and 25!

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Paul Burkitt 27th Jan 14 of 16

Re RTN. I did own, the shares, but got out after the first profit warning. I never did like Franki and Benny's concept, but did like the Mexican offering, Chiquito. Decided to go and see if I could see any problems. I was shocked by the poor services levels, AND, they were clearly changing the menu to include less expensive ingredients. I questioned them on this, and they claimed no changes had been made. I am a creature of habit, and order the same thing every time, so I knew there were changes. No sure if that was one restaurant or chain wide. Vowed, not to return, and have witnessed a couple more profit warnings. Also the restaurants look tired, owing to a lack of investment. Probably some venture capital group may find them atttractive, since there is no debt, but I would not bank on it.

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smatthews1 28th Jan 15 of 16

someone has to question why the had 37 restaurants close versus 24 they opened. Are they rushing into these without doing their homework on location? it doesnt look good for the brand seeing every other site close. I would rather they opened 10 restaurants that stayed open.

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Trigger14 29th Jan 16 of 16

I think it's quite likely that the Restaurant (LON:RTN) brands are terminally damaged. They seem very tired and 90s to me and I was surprised to find out they still exist - the restaurant market is obviously very competitive and has moved on leaps and bounds since then. My perspective is skewed living in London but I still think it is quite unlikely that these brands have much of a long term future. While I wouldn't rule it out I wouldn't have that much confidence that management initiatives to turn the business around would work.

Blog: Quality Share Surfer
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About Graham N

Graham N

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified and hold an audited, FTSE-beating investment track record.  Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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