Shares of Kromek (LSE: KMK) have enjoyed a strong run this year, rising from 22.5p to a recent high of 36p. The company today released its results for its financial year ended 30 April and with the shares down 8.6% on yesterday’s close, this is a stock that is interesting me at a current price of 33p.
Ramping up revenues
Kromek is a radiation detection technology company focused on the medical, security screening and nuclear markets. It said 2016/17 was “another year of good progress and ramp-up in commercial activities with revenue growth driven by higher product sales across [its] three key target markets.”
Revenue for the year increased 7.5% to £9m but 2017/18 will see a step change as revenue comes through on large-scale contracts that have been secured over the last 24 months. Management said: “The group expects to report year-on-year revenue growth of approximately 40%, in line with market expectations.” So we’re looking at about £12.6m.
Kromek isn’t currently profitable, reporting a £3.1m bottom-line loss today, having expensed £3.5m of research costs for products and platforms that it said are “linked to existing contract deliverables and significant future revenue opportunities.”
The company had cash of more than £20m on its balance sheet at year-end (thanks to a fundraising in January) and has a good number of institutional investors on its shareholder register. While the cash pile means I’m unconcerned by Kromek’s current lossmaking status, it also means I have to value it on revenue rather than profit at this stage.
Valuation
At the current share price of 33p, the market capitalisation is £85m, so the stock trades at 6.8 times next year’s guided revenue of £12.6m. This looks an enticing multiple to me for an early-growth business, whose advanced patent-protected technologies are gaining increasing traction in the attractive medical, security screening and nuclear markets.
The shares appear very buyable to my eye, although as a higher-risk investment this is a stock I would only take a small stake in at this stage of its development.
Demographics growth driver
ConvaTec (LSE: CTEC) is another stock in the health sector I’ve got my eye on. This FTSE 100 firm is a lower-risk proposition than Kromek but, like the small-cap, its share price has fallen back somewhat after a strong run. ConvaTec’s shares climbed from 234p at the start of the year to a high of 344p but are currently trading at 327p.
In a Q1 trading update released last month, the company reported revenue growth in its Advanced Wound Care and Ostomy Care divisions of 4.2% and 3.3% respectively. It saw flat revenue in Continence & Critical Care (due to margin improvement measures) and a 3.1% decline in Infusion Devices division (due to anticipated customer inventory reductions). But management reaffirmed its previous guidance for 2017 of group organic revenue growth in excess of 4% at constant currency.
On the back of this, the City consensus is for ConvaTec to deliver earnings per share of $0.20 (15.6p), giving a price-to-earnings ratio of 21. This is not a premium rating by the sector standards and with demographics providing a long-term driver for growth, the shares appear to be an attractive buy.
