Take a pass on Photon Control, says Paradigm Capital

Photon Control (Photon Control Stock Quote, Chart, News TSX:PHO) has felt the impact of the ongoing downturn across the semiconductor space but the company still has a lot going for it and looks ready for the sector-wide recovery, according to Paradigm Capital analyst Kevin Krishnaratne, who on Friday reiterated his “Hold” rating while dropping his target price from $1.25 to $1.10 per share.

Vancouver-based optical sensor company Photon Control on August 8 released its financial results for the three and six months ended June 30, 2019, coming in with second quarter revenue of $7.1 million, a decrease of 53 per cent year-over-year, and EBITDA of $1.2 million, reflecting a margin of about 17 per cent. The company finished the quarter with cash and cash equivalents of $31.4 million and used $3.7 million in cash over Q2 to repurchase 2.8 million shares under the NCIB. Photon Control’s order backlog stood at $10.7 million by the end of the Q2 compared to $10.8 million at the end of Q1. Management chalked up the shrinkage to the continued slow-down in capital spending from semiconductor manufacturers.

“Photon Control has focused on building a resilient business model and as a result, we generated EBITDA at the high end of guidance for the quarter despite current market weakness,” said CEO Nigel Hunton, in the quarterly press release. “We continue to execute our strategy of investing in research and development and increasing our focus on customers to maximize our future growth opportunities. We plan to increase our cash position through the rest of the fiscal year as we completed our share buyback program in July 2019 with the aim of strategically investing in initiatives that will drive the long-term growth of the Company.”

In an update to clients, Krishnaratne noted that PHO’s quarterly revenue was in line with his estimate along with being in the middle of management’s guidance, while the $1.2 million EBITDA was a hair higher than his $1.0-million estimate, with the analyst pointing to management’s focus on operating efficiency in a tough environment.

Krishnaratne is moving his 2019 forecast incrementally lower, which supports his continued “Hold” recommendation, but the analyst also said that he is starting to see some initial signs of recovery from various industry sources. He also noted that PHO management’s guidance for Q3, with revenue projected to be between $6.5 million and $8.5 million does, at midpoint, reflect positive quarter-over-quarter growth. Krishnaratne points to PHO’s recently completed transition to its new Japanese distribution partner (Japan Laser Corp.) with the company placing significant orders with a larger customer in the region.

“With regards to our valuation, we note that semiconductor component peers MKS Instruments and Advanced Energy are currently trading at ~9.0x 2020e EBITDA, while the average target multiple for these stocks sits closer to 10.0x. We use a slightly higher multiple on Photon given our confidence in management, the company’s technology edge (market leader as it relates to precision under extreme environments), and the prospect of M&A given the ~$30.0 million cash on its balance sheet and no debt,” writes Krishnaratne.

The analyst is now calling for fiscal 2019 revenue and EBITDA of $29.6 million and $5.2 million, respectively, and fiscal 2020 revenue and EBITDA of $33.3 million and $7.4 million, respectively. His $1.10 target represents a projected 12-month return of 24 per cent at the time of publication.