2 high-growth stocks that are just getting started
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.
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.
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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.
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