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A Look At Two 21 April 2014


I am running an eye over St. MODWEN in the weekly column tomorrow, the Midlands based regeneration specialist, which is also focused on commercial and residential property development.

Although the shares currently £3.82p have enjoyed a strong run over the last year or so, I feel they are worth of a look for further potential upside. 

The article should be available via the link by late morning 22 April 2014.





Those of us, who recall the heady and frankly crazy days of the dot com boom, will no doubt see some distinct parallels within recent trends.

In particular, an ever increasing number of companies have rushed towards the route of floatation, although we may now invariably see that begin to taper off. 


Identifying one of these newcomers in which to make an investment that can bring the desired longer term rewards, as opposed to a short term gain, can be a difficult enough process to say the least. 


While we all have our own criteria to apply in terms of a selection process, there are a number of key points that I tend to home in on, such as a patented product that is preferably in the disruptive mould, actual sales at the point of coming to market, along with a business model that possesses the right ingredients to go on and succeed.

Then of course, a management that actually has ability, along with the right experience, to deliver.


Even when an apparently solid case can be made out for making an investment on such a basis, the road to longer term success can be invariably choppy.

Great stories of ultimate delivery such as Xaar as a case in point are clearly testament that such a journey to success, can be anything but a straightforward one. 


In the case of KROMEK based in County Durham, its recent baptism into the market has already been something of a rollercoaster ride, with the shares trading between a low of 35p and a high of 84p.


Given that the company only came to the market in October of last year,  that certainly demonstrates a high level of volatility by any measure.


 Kromek IPO’d at a price of 51p per share raising some £13.4m net proceeds in the process, where some large and well known Institutions emerged with holdings.

These include Schroders, Herald and NFU Mutual, along with the smaller but long term supporter Amphion Innovations which has been involved since 2005.

But, what of the business here, which has clearly popped up on the radar, albeit with the usual elements of risk.


In short, Kromek has developed significant expertise and capabilities concentrated on materials and subsequent products addressing radiation detection and the enhancement of various technological systems.

Areas of prominence are on X-ray images for the health market along with detector technology, the latter of which is concentrating on aviation security coupled with border control.


It doesn’t take too much imagination given the vastness of the market and issues surrounding the latter in particular, to speculate on potential revenues, if a

technology and specific products can be widely adopted.

Firstly though, it is worth taking a look at the companies apparent addressing of the x-ray arena itself, where despite giant leaps in medicine and diagnostics, the process remains somewhat entrenched in the past to say the least.


Having been invented more than 100 years ago x-ray images largely remain in black and white today, which can be grainy or obscured, leading to readings that can be difficult to view.

With around 180 patents actual and pending, Kromek uses proprietary Cadmium Zinc Telluride (CZT) technology that amongst other things can apparently  assist the delivery of x-rays in colour.

The company has actually been pioneering digital colour imaging for as much, which has seen it focused on ground-breaking innovation, relating to materials technology and advanced 3D imaging.

CZT demonstrates specific advantages, including high sensitivity for x-rays, superior energy, room temperature operational efficiency and importantly safer radiation levels.

The company has already worked and continued to do so with some major manufacturers of equipment, such as GE, Siemens and Philips along with a number of other unnamed OEM’s Globally.


Clearly there would appear to be some exciting prospects for the company, particularly within the health and nuclear medicine sector which is a vast and continually growing market, along with openings in the nuclear market itself.

Addressing security is also a key aspect, although as yet, is the smaller area for Kromek which focuses on the area of bottle scanners and image screening.


In recent years the potential for a terrorist attack through liquids or aerosols on planes has seen a massive crackdown by authorities.

Not only does it create problems within security and logistics, but it can be time consuming and costly.


Kromek’s answer to the problem is highlighted by a focus on its “Identifier” device, which is one of only three such products that have actually been approved to meet the strict standards as laid out by the EU.

The device analyses and classifies liquids in under 20 seconds.

New European regulations maintaining all airports must screen in-transit passengers for LAG’s which cover contents of pressurised containers which include those such as paste’s gel’s, can surely only be beneficial for the  likes of the company providing openings and growth opportunities.


With what appears to be obvious potential, things look to be pretty positive for the company, which was originally spun out of a Durham University project, or one would perhaps assume as much


The reality, despite great strides being made from conception to commercialisation, is that Kromek’s short time as a listed entity, has already provided shareholders with more than a few ups and downs.

Perhaps, and I think it is a valid point, the forecasts for this one were just too aggressive at the outset, with numbers geared for the upside resulting in any slip in terms of delivery, seeing the shares severely punished.

That would certainly appear to be the case here, where the company just five months into its listing, delivered a Trading Update that was not exactly what holders wanted to hear.


This was effectively a major profit warning which saw Kromek stating that it expected revenues for the period to be significantly below current market expectations.


That was largely down to a delay in a number of large contracts, specifically for UK and US Government programmes, along with Japanese markets concentrated on nuclear detection products along with further large orders in the medical and security markets.

By any measure that looked to be pretty comprehensive across a large spread of markets, so little wonder the shares effectively went into free fall.    

What I find a little surprising is why the revenue numbers were pitched so highly at a forecast £11.3m for 2014 against the previous £2.6m delivered in 2013, giving little room for manoeuvre.

While it is obvious the potential for delivery is indeed there, I feel particularly with newcomers or fledgling businesses it is far better to under promise and over achieve.  

While no doubt the company’s aim was to ensure the floatation would be well supported, surely more sympathetic estimates would have still ensured support for the IPO in the recent climate.

Since that warning however, the shares have recovered somewhere nearer the floatation price and are I feel still worthy of a look, as recent news serves to highlight the potential


In the wake of that untimely market update, there has since been the news that Kromek has signed a long term contract for material rights with what it describes as an established SME manufacturer of x-ray diagnostics and analyses equipment in China.

Kromek had already been working with the unnamed customer for around 9 months and has now signed a long term supply agreement that is exclusive within the China territory, but does not apply to other territories.

Revenues of between $1.4m and $10.2m are provided for financial years 2014-2015 and 2015-2016, while the overall contract covering 7 years is worth up to a potential $159m.

Without wishing to get carried along by a tide of euphoria on the deal, it nevertheless illustrates the potential upside moving forward, as this is effectively just one customer.

There have also been a couple of recent Director buys with the Chairman who also sits on the Amphion board picking up 40k at 50p per share, while a non executive purchased 30k at 46p.

Not massive in isolation and I never take Director buys as a total green light, but worth noting along with other factors.


The company also announced other business wins earlier this year such as an $854k order to supply an OEM with radiation detectors along with integrated electronic components.


Again in isolation it may not appear to amount to much, but as the company extends its reach, forges further and larger relationships, there would appear to be potential for significant momentum to build.


Panmure Gordon currently has a Hold rating on the stock with a pre-tax loss of £4m pencilled in for this year, falling to £1.2m next year, which are downgraded numbers from previous market forecasts.  


Clearly Kromek will have its fair share of critics as well as supporters and with a market cap of £48m, it can be argued that the price is up with events on the basis of recent news and those subsequent downgrades.


That said, there should be sufficient cash to see them through to profitability, providing new and delayed orders feed through.


Having already succeeded in doing business with three of the top four global medical –imaging companies and with clear target markets the shares may be worth keeping an eye on, particularly in light of the most recent contract announcement.

The business although UK based has operations in the US and is broadening its reach to Asia as recently demonstrated.


Making the transition from R&D to commercialisation is no easy feat and many companies have ultimately failed to deliver, often having to go back to the market for further funds along the way.


In the case of  Kromek however, it  has in-house capability of  combining the CZT compound with advanced software, electronics and integrated circuits, which should at least give it a chance for capitalising on its technology.

Together this enables the company to create components, sub-assemblies and the finished products for market on a global scale.  


Competition appears fairly limited with some high barriers to entry, although as many of us are aware, widespread adoption and acceptance can often take much longer than envisaged.

The team led by CEO Dr. Arnab Basu MBE who has a PHD in Physics from Durham University have a wealth of experience across the sciences, which no doubt serves the company well on the technical and research side.

One does wonder though, about the board’s ability to maximise the ability on a commercial basis, given where their apparent strength lies, although it is early days as yet.


It also begs the question whether there may be a strengthening in that area going forward, after all some of the truly great success stories are ultimately achieved by fairly frequent board changes and additions along the way in order to push the business forward.


All in all, Kromek does look an interesting company with potential that if it can deliver, will no doubt be reflected in a share price appreciation.

Equally further delays or warnings will no doubt test sentiment, either way it is one that I will endeavour to keep a close eye on.     


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