Photon Control is an outright bargain, says Echelon Wealth

It’s time to cherry-pick for quality within the market correction, according to Echelon Wealth Partners analyst Amr Ezzat, who in an update to clients on Tuesday argued that semiconductor name Photon Control (Photon Control Stock Quote, Chart, News TSX:PHO) should be on your list.

Vancouver-based Photon Control, designs, manufactures and distributes optical sensor technology to the wafer fabrication equipment and semiconductor and solid-state industries, delivered its fourth quarter financials last week, showing revenue flat sequentially but up seven per cent year-over-year to $8.9 million.

EBITDA for Q4 came in at $2.1 million or 23.9 per cent of revenues, down from $2.5 million a year earlier.

Even with those so-so numbers, Photon said it had already recorded $14 million in revenues for the first quarter 2020, with another $1 million of shipments expected by the quarter’s end.

On the company’s outlook vis a vis COVID-19, CEO Nigel Hunton wrote in the quarterly press release, “While it’s currently unknown as to how the COVID-19 virus will impact our business, we are closely monitoring the situation and remain committed to our growth strategy. Longer-term, the Company will maintain its investments in research and development and expand its sales and marketing footprint to new markets, positioning us for long-term growth in revenue, profitability and shareholder value.”

Ezzat said he’s still a fan of Photon even in the current macro environment, saying, “While we fully recognize the cyclical nature of the Wafer Fabrication Equipment (WFE) industry, we feel the downside to the stock price from current levels is limited relative to an attractive upside potential. Namely, the Company’s current stock price of $0.80/share contrasts to a cash position of $0.32/share (and growing) and our target price of $1.75/share.”

“The Company’s current shares are trading at a mid-cycle EBITDA multiple of ~4x (~10x EV/trough EBITDA and 2.5x EV/peak EBITDA) versus the Company’s five-year average NTM EBITDA multiple of 8.9x, a bargain when considering the Company’s cash position as a potential bottom,” Ezzat said.

With the new update, Ezzat reaffirmed his “Buy” rating for the stock and $1.75 target, which at press time represented a projected one-year return of 118.8 per cent.

The analyst noted that while PHO’s free cash flow came in slightly negative, as guided, at negative $1.0 million in the Q4 compared to $3.8 million for the previous quarter, Photon’s cash balance remained relatively stable, nonetheless, at $33.4 million compared to $34.0 million for the previous quarter. Management is calling for positive FCF for this first quarter of 2020.

This past December, Photon Control announced a new product launched by Korean elaser and electrosurgical manufacturer Union Medical which uses PHO’s optical sensors and systems. The medical application represents a new market for the company, Hunton said.

“This expansion to the medical industry confirms our ability to leverage our technology in markets sharing similar characteristics to our core business. With a strong market position in the semiconductor industry, we plan to build on our existing technology and know-how to enter into near-adjacent markets,” said Hunton in a press release on December 16, 2019.