Kromek profit beats expectations, so why are KMK shares down 5%?

Kromek Group plc (AIM: KMK) delivered FY26 profit before tax slightly ahead of expectations on September 14, yet investors focused instead on a sharp reduction in gross margin and a move from net cash to net debt as the radiation-detection company transitions away from unusually profitable licensing income. Revenue increased to £27.1 million from £26.5 million, but adjusted EBITDA fell to £8.1 million from £10.3 million and profit before tax declined to £2.5 million from £3.1 million. Delayed London data showed Kromek shares around 6.8p during the session, down approximately 4.9% and valuing the company at roughly £44.6 million.

The financial comparison requires care because FY25 benefited heavily from licensing revenue connected with the company’s Enablement Agreement. Product revenue expanded strongly during FY26 while licensing revenue decreased, creating a healthier-looking commercial mix in some respects but a much lower group gross margin because physical product sales do not carry the exceptional economics of intellectual-property licensing.

Why did Kromek’s gross margin fall from 80.9% to 62.8%?

Licensing accounted for 62% of FY25 revenue but only 37% in FY26, while product sales increased from £7.0 million to £13.8 million and represented 51% of the latest year’s sales. Total licensing revenue fell to approximately £10 million from £16.5 million, causing gross profit to decline from £21.4 million to £17.0 million even though group revenue increased.

This is an important distinction for investors. A falling gross margin is usually interpreted negatively, but part of Kromek’s change reflects the exceptionally high-margin nature of the prior-year Enablement Agreement rather than deterioration in the underlying margins of its two operating divisions. The company said underlying divisional gross margins were maintained year on year and expects them to remain relatively stable, subject to sales mix.

The investment case therefore depends on whether much larger product volumes can compensate for losing some extraordinary licensing profitability. If Advanced Imaging and CBRN Detection scale substantially, absolute profit can grow even at a lower percentage margin. If product growth slows, however, investors may look back at FY25 as an earnings peak created by licensing rather than a sustainable baseline.

How strong was Kromek’s underlying Advanced Imaging growth?

Advanced Imaging generated £19.9 million of revenue compared with £20.3 million a year earlier, but that headline decline is distorted by prior licensing contributions. On the company’s underlying measure, Advanced Imaging revenue increased 76% to £6.7 million from £3.8 million. CBRN Detection revenue increased 17% to £7.3 million.

The product mix is increasingly important because Kromek’s cadmium-zinc-telluride detector technology targets medical imaging, security and industrial applications. Commercialisation at scale would create a different quality of earnings from periodic licensing transactions, albeit initially at lower gross margins.

Cost control helped protect profitability during the transition. Distribution and administrative expenses fell to £14.1 million from £16.7 million and represented 52% of revenue compared with 63% previously. That allowed Kromek to deliver £2.5 million of profit before tax, slightly ahead of market expectations despite lower gross profit.

Why did Kromek move from £1.2 million net cash to £1.5 million net debt?

Cash at April 30 increased to £4.2 million from £1.7 million, but borrowings rose sufficiently to produce net debt excluding lease liabilities of £1.5 million compared with £1.2 million of net cash a year earlier. Kromek attributed much of the movement to investment in working capital required to support Advanced Imaging growth and approximately £1.04 million of payments received shortly after the year-end rather than before it.

Adjusting only for those delayed receipts would have left net debt excluding leases at approximately £0.5 million, so the balance-sheet deterioration is not as severe as the year-end snapshot might initially imply. Nevertheless, the company has also secured a £6 million three-year revolving credit facility and negotiated a further £3 million extension expected to be documented by the end of September.

That additional liquidity provides working-capital flexibility but should not be confused with free cash. The key question for FY27 is whether higher product revenue begins converting into operating cash strongly enough to reverse the increase in borrowing.

Does the September 14 director-family share purchase change the Kromek investment signal?

Hours after publication of the results, Kromek disclosed that the wife of Non-Executive Chairman Rakesh Sharma had purchased 144,092 shares at 6.94p each. The transaction was worth almost exactly £10,000 and increased Sharma’s disclosed interest, including his wife’s holding, to approximately 1.58 million shares or 0.2% of the company.

The purchase is a useful sentiment signal but should not be overstated. A £10,000 investment is modest relative to Kromek’s roughly £45 million market value and cannot by itself validate the valuation case. Its timing is nevertheless notable because it occurred on the same day that shares fell following the annual results.

Management says FY27 has begun well, with a healthy commercial pipeline and order book, and that trading remains in line with market expectations. The most important evidence over the next year will be whether product-led growth can increase revenue and cash generation sufficiently to offset the loss of exceptional licence margins.

For investors, September 14 exposed the core tension clearly. Kromek is becoming more product-driven and reported a pre-tax profit slightly above expectations, yet the new earnings mix generates materially lower gross margins and more working-capital demand. If product scale accelerates, that transition may ultimately make the business more repeatable; until then, the market has good reason to scrutinise every pound of revenue for the margin and cash attached to it.