Kromek (LSE: KMK) is a pioneering UK technology company with exciting growth potential. It designs, develops and produces x-ray and gamma-ray imaging and radiation detection products for the medical, security screening and nuclear markets.
I last wrote about the company in December when it reported 27% revenue growth in the first half of its financial year. It said it was well positioned to achieve EBITDA break-even for the full year. The shares were trading at 25p at the time and I rated the stock a ‘buy’ on its valuation of 5.2 times forecast full-year revenue. How has the company performed since, and is the valuation still attractive today?
Highly lucrative prospects
The full-year results saw Kromek’s revenue growth accelerate to 32%, with £11.85m booked on the top line, and a £0.5m maiden EBITDA profit. Net cash at the year end (30 April) was £6.5m. The revenue growth was driven by continued delivery on previously-signed agreements, as well as commencing delivery on new high-value contracts won during the year. The company also continued to protect its technology, filing seven new patents and having 29 granted during the period.
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Contract news since the year end has been strong. The latest announcement (today), is that the US Defense Threat Reduction Agency is funding Kromek to the tune of $1.8m to develop a next-generation military-grade version of its civilian D3S handheld radiation detection device. If successful, I believe commercial follow-on orders, not only from the US, but also potentially NATO, could be highly lucrative.
Kromek’s shares are up 7.5% to 28.5p today, giving the company a market capitalisation of £74.2m. This is 4.9 times current-year forecast revenue of £15.05m — a cheaper rating than when I wrote about the stock last year. As such, I continue to rate it a ‘buy’.
Good buying opportunity
Fellow AIM-listed small-cap Gear4music (LSE: G4M) is ahead of Kromek in its development. Revenue is expected to burst through the £100m level this year and at a current share price of 517p, the company’s market capitalisation is £108m. However, it’s still at a relatively early stage of growth and is another business I’d happily buy a slice of for its terrific potential.
Gear4music is already the largest UK-based online retailer of musical instruments and music equipment but it’s also rapidly increasing its international reach. In its last financial year (to 28 February), the UK contributed £44.3m to group revenue (up 27% on the previous year) and International contributed £35.8m (up 69%).
It was a year of heavy investment for the company but net debt at the year end was a modest £5m and the investment in the business gives it a platform for further strong growth. City analysts are forecasting annual earnings increases of over 50% this year and next. The share price got as high as 865p last October and I believe the decline to the current 517p represents a good opportunity to buy in. The valuation is still a premium one — 50 times this year’s earnings, falling to 32 times next year’s — but I reckon the growth potential is such that the rating is more than merited.
