Kromek fights cancer and terrorists

Kromek could hardly be more topical. The AIM-listed tech company has developed a range of radiation detection products able to spot cancer cells much earlier than existing equipment, identify liquid explosives at airports, and keep a check on radiation levels at nuclear power stations including Fukushima. These are huge markets and the technology is already proven in the field. Now it must turn that promise into profits.

Sales are certainly rocketing. The Durham University spin-out grew revenue by a third in the six months ended 31 October to £3.2 million. Much of that growth has come from nuclear and security products and US government contracts, with money from manufacturers in medical imaging and the sale of bottle scanners to airports also chipping in.

Of course, military budgets are tight and government procurement departments remain unpredictable. That's why sales are weighted to the second half this year. However, Kromek still thinks sales over the next six months will be double those in the first half.

House broker Panmure Gordon errs on the side of caution. It's cut estimates for revenue in the year to April 2015 by £3 million to £10 million, still up 70% year-on-year. That means an annual pre-tax loss of £2.9 million, says Panmure compared with its previous forecast for a £1.2 million deficit. Margins, however, are improving - gross margin rose by 900 basis points in the half-year to 70% - and the firm expects to be EBITDA positive for the second half of this year. Expect year-end net cash of £2-£3 million, too.

A first-half loss of £2.3 million was slightly better than last year. It would have been even less but for the cost of being a listed company - finance chief Derek Bulmer puts it at about £250,000, or two-thirds of the increase in admin and operating costs during the period. The rest went on growing the sales team.

And this should be money well spent. Kromek's expertise is in the manufacture of cadmium zinc telluride (CZT) crystals used for digital colour imaging in x-ray and gamma-ray detectors. Crucially, it's one of only two companies in the world supplying the material.

Kromek is currently working with one of the top four makers of Computerised Tomography equipment, a $5 billion market. New systems will be available to buy in the next 18-24 months. In the meantime, the company is signing deals with airports, a Chinese producer of nuclear medicine imaging kits and the US defence department.

And alongside these latest results, Kromek said a new extension to a project with the US Defense Advanced Research Projects Agency (DARPA) is worth up to $1.1 million over 16 months. Kromek will supply detector systems to help develop an advanced portable detection system for gamma and neutron radiation. If it takes off, the Americans could decide to issue millions of detectors to police departments and the military, a market put at over $1 billion.

All of this is very exciting, and it is clear that Kromek has both the technology and financial expertise to make the business work. Being a small loss-making company and subject to volatility in the order book, the share price has fallen from 51p on admission to AIM in October 2013 - it was as high as 83p shortly after - to below 30p last November. It's up 7% Wednesday and now trades at 39p. Equity Development thinks they're worth 45p and Panmure 52p. If Kromek cracks the US medical and radiation detector market, the £43 million company could be worth considerably more.

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