Buy into Kromek's £7.5mn open offer of new shares

Sedgefield-based Kromek (KMK:5p), a radiation detection technology company focused on the medical imaging and nuclear markets, has announced a conditional placing and open offer of shares, at 5p, to raise £7.5mn net of expenses. The 160.5mn new shares being offered represent 37 per cent of Kromek’s existing shares in issue.

The six directors are subscribing for a total of 1.4mn shares and existing shareholders are being offered one new share, at 5p, for every 21 held to raise £1mn under the open offer. The net proceeds will be used for:

• Development and working capital for computed tomography (CT) (10 to 15 per cent of monies raised).
• Investment in productivity and efficiency of cadmium zinc telluride (CZT) manufacturing (15 to 20 per cent).
• Expanding sales and marketing for Kromek’s medical imaging and nuclear security activities (10 to 15 per cent).
• Strengthening the balance sheet to facilitate the restructuring of the group's debt (50 to 60 per cent).

Last month, Kromek signed a seven-year agreement with a top-tier original equipment manufacturer (OEM) to develop CZT-based detectors for the client’s scanners (‘Analysts think this stock’s share price will quadruple’, 19 April 2023). At the time, analysts expected the group to win additional customers looking for CZT detection solutions in both CT and single photon emission computed tomography (SPECT), given the technology’s superior sensitivity, higher energy resolution and better imaging contract performance capabilities.

Kromek is doing just that, announcing a $1.4mn contract with a new [undisclosed] OEM customer, an established player in the medical imaging sector in Asia. The order is for Kromek’s CZT-based detector modules and will be used in the customer’s next-generation SPECT systems.

It therefore makes sense to strengthen the group’s balance sheet and provide additional capital to support the anticipated ramp-up of sales as more orders flow in. However, issuing new shares at a 25 per cent discount to the previous closing price unsurprisingly prompted a decline in Kromek’s share price to the placing price. It didn’t help matters that the announcement was made 45 minutes before the market closed ahead of a long Bank Holiday weekend. Also, existing shareholders have only been allocated £1mn of shares in the open offer, whereas the placing is seven times larger.

That said, the business opportunity for Kromek remains the same as I highlighted three weeks ago (‘Analysts think this stock’s share price will quadruple’, 19 April 2023), so expect the share price to recover once the dust settles and after the fundraising closes at the end of the month. In the circumstances, it makes sense to take up your allocations in the open offer by the 18 May deadline.

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