Photon Control is a “Top Pick” at Echelon

It’s survival of the fittest for businesses in the current economic environment and optical sensor company Photon Control (Photon Control Stock Quote, Chart, News TSX:PHO) has the stuff to make it through to the other side, according to Echelon Wealth Partners analyst Amr Ezzat.

Ezzat provided an update to clients on PHO Sunday. In it, Ezzat maintained his “Buy” rating and Top
Pick status for PHO and his $1.75 target price, which at press time represented a projected 12-month return of 103.5 per cent.

Formed in 1988 and emerging as a public company in 2000, Vancouver’s Photon Control is a precision measurement company that makes optical sensors primarily for wafer fabrication companies in the semiconductor industry. Last year in the highly cyclical semiconductor space, PHO had revenue of $32.7 million, down from $46.7 million in 2018, and operating expenses of $12.8 million, down from $13.1 million the year before.

Gross margins for 2019 fell to 53.7 per cent from 54.9 per cent in 2018. Photon Control finished 2019 with cash and cash equivalents of $33.4 million and an order backlog of $20.8 million by December’s end, up substantially from a backlog of $11.9 million at the end of September. In PHO’s fourth quarter and full-year press release, management said the rise in backlog was due to an upturn in wafer fabrication
equipment spending and improved near-term demand from manufacturers.

CEO Nigel Hunton said the uptick in PHO’s backlog is an encouraging sign for 2020. “We are experiencing an improved wafer fabrication equipment environment, reflecting continued strength in the foundry and logic markets and the beginning of a recovery in the memory market,” said Hunton in the press release.

“As of today, we have recorded $14 million in revenues for Q1 2020, and we currently expect $1 million of additional shipments by quarter-end, provided no substantial disruptions to the global semiconductor supply chain.”

In his assessment, Ezzat said “the permanent loss of capital” is the biggest risk investors face today, as the shutdown imposed by COVID-19 will severely stress-test many businesses. Fortunately for Photon Control, its hefty cash balance and low cost structure give it important defensive attributes to withstand the downturn, Ezzat said.

“We believe the company’s balance sheet strength together with the company’s leverage to an economic upcycle constitute attractive risk-reward characteristics at current levels. Namely, the Company’s current stock price of $0.86/share contrasts to a cash position of $0.32/share (and $0 debt),” Ezzat wrote.

The analyst believes that PHO’s products still aren’t fully entrenched in its customer base, leading to growth opportunities going beyond industry dynamics in semiconductors.

Ezzat’s forecast calls for revenue climbing from the trough of 2019 to $37.2 million and adjusted EBITDA of $8.9 million. For 2021, he is calling for a top line of $40.9 million and adjusted EBITDA of $10.2 million.

“The Company’s current shares are trading at a mid-cycle EBITDA multiple of 4.5x (11.7x EV/trough EBITDA and 2.8x 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.