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2 secret growth stocks to watch in 2018

Technology group Kromek (LSE: KMK) posted interim results today for the six months to 31 October. It reported “another period of good progress,” with revenue increasing 27%, and said it’s well positioned to “achieve EBITDA breakeven, in-line with market expectations” this financial year.

Growing reputation

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 period under review saw higher product sales across these key markets, as well as the continued winning of new high-value contracts.

Its D3S product, which it describes as “the world’s most advanced, portable, nuclear radiation detection device,” was successfully deployed in high-profile situations for safeguarding against nuclear terrorism, including the NATO Security Summit and Donald Trump’s visit to Brussels in May. And the company also enjoyed reputation-enhancing successes in its other key markets.

Attractive valuation?

Analysts are forecasting revenue of £12.5m for the full year (almost 40% ahead of last year) and Kromek appears to have substantial commercial opportunities in the medium and long term, including from an $8.2bn US Department of Defence security programme.

The shares have fallen quite heavily on today’s results — down 8% at 25p, as I’m writing. This values the AIM-listed firm at £65m, which is 5.2 times forecast revenue. Personally, I view this as an attractive multiple and rate the stock a ‘buy’, albeit a risky one, due to it being an early-growth and currently lossmaking business. Risk-averse investors may want to monitor progress from the sidelines for the time being.

I put today’s share price fall partly down to the inherent volatility of small-caps and partly down to the fact that, while Kromek is moving rapidly towards EBITDA breakeven, cash burn in the first half was £5.3m. However, I note that £3.7m of this was investment in development and working capital and that the company is well funded for the year ahead with net cash on the balance sheet of £12m.

Terrific buy?

Fellow AIM-listed firm Idox (LSE: IDOX) is already profitable, and has been for a good number of years. However, recent problems have seen its shares collapse 58% from 65p to 27p in the space of just over five weeks.

On 14 November, in a trading update for its financial year ended 31 October, the software provider, which counts over 90% of UK local authorities among its customers, said sign-off on some contract wins had been delayed beyond the end of the financial year due to customer disruption in the wake of June’s General Election.

This was hardly the end of the world, as the board’s lowered EBITDA expectation of £23m was still above the prior year’s £21.5m. However, in a further trading update on 13 December, it lowered its expectation to £20m. This was due to an internal review in preparation for the full-year audit identifying “a small number of revenue items that it does not consider should be recognised in the FY2017 results.” It added that “clarification of these issues has been complicated by the sudden absence of Andrew Riley, Idox’s CEO, due to illness.”

The stock could prove a terrific buy at the current level but the nature of the news is disconcerting enough to persuade me to wait for the company’s final results in February.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.