Photon Control downgraded to “Hold” at Paradigm Capital

Ahead of the company’s fourth quarter results, Paradigm Capital analyst Kevin Krishnaratne has lowered his price target and downgraded his rating on Photon Control (Photon Control Stock Quote, Chart TSX:PHO).

On Thursday, before market open, Photon Control will report its Q4 and fiscal 2018 results. Krisnaratne thinks the company will post EBITDA of $2.3-million on revenue of $8.6-million, within the guidance of $8-9-million the company estimated in November.

The analyst says PHO is facing new headwinds.

“Since Q3, in November, several semiconductor industry datapoints have been reported that suggest a weaker than previously expected 2019, particularly in Memory, which is the key market for PHO. Lam Research, one of Photon’s largest customers, noted on its Q1 call (Jan. 23) that industry fundamentals have weakened to start the year, with equipment spending now poised to decline in the mid-teen range. Applied Materials, during its Q1 (Feb. 14), noted mid- to high-teen declines in 2019 in equipment spending, with Logic & Foundry anticipated to be flat, suggesting greater pressure in Memory (we think at least -20% y/y),” the analyst says. “Our new 2019 revenue estimate of $39.8M reflects ~20% declines from 2018 in Photon’s core products, partially offset by $4.0M in new product sales versus $2.5M in 2018. Our new 2019 EBITDA estimate of $10.8M suggests margins compressing to ~27% versus ~33% in 2018. Recall that PHO plans to step up R&D to support new product development (the company notes it has a pipeline of ~$40M in related sales that it could potentially close in the next 2–3 years).”

In a research update to clients today, Krishnaratne downgraded Photon Control from a “Buy” to a “Hold” and lowered his one-year price target from $2.00 to $1.50, implying a return of 13 per cent at the time of publication.

The analyst thinks PHO will post EBITDA of $15.7-million on revenue of $47.1-million in fiscal 2018. He expects those numbers will decline to EBITDA of $10.8-million on a topline of $39.8-million the following year.

“While the outlook for 2019 semiconductor trends has been weak, there has also been a growing view that the industry may be reaching its bottom and a rebound is in sight for 2020, helping push related stocks higher over the past few months,” Krishnaratne adds. “While PHO is well positioned to benefit along with the industry, and is designing new products to diversify its mix, its current skewing toward Memory and the near-term pressure in this market suggest at least a few more quarters of softness.”