Photon Control gets new $3.00 target at Paradigm Capital

A strong third quarter sets the table for a record Q4 for Photon Control (Photon Control Stock Quote, Chart, News TSX:PHO), according to Paradigm Capital analyst Daniel Rosenberg, who reviewed the company’s financials in an update to clients on Friday. Rosenberg kept his “Buy” rating but bumped up his price target from $2.75 to $3.00, saying the company’s got a number of tailwinds blowing in its favour.

Optical sensor makers for measuring temperature, position and flow, Photon Control began as an oil and gas-focused business but now has its primary vertical in semiconductor equipment manufacturing, with its top three customers accounting for 90 per cent of that segment.

The Vancouver-based company released its third quarter numbers on Thursday, coming in with revenue of $16.3 million compared to $8.7 million a year earlier and EBITDA of $6.2 million compared to $2.4 million for Q3/2019. Net income was $3.6 million and basic EPS was $0.03 per share compared to $0.01 per share a year earlier. PHO’s year-to-date revenue of $49.7 million at the quarter’s end was a record for the company and more than doubled last year’s $23.9 million.

“We have delivered a very strong performance through the first nine months of the year,” said Nigel Hunton, CEO, in a press release. “The global pandemic has accelerated the digital transformation of the economy and Photon Control continued to benefit from the demand for high-performance computing and 5G infrastructure that positively impacts the semiconductor industry. We have exceeded our best-ever year in terms of both income and revenue, and we are only three-quarters of the way through the year.”

Photon Control reported cash and equivalents of $46.6 million at the quarter’s end (September 30) compared to $33.4 million at December 31, 2019, while the company’s order backlog was $27.0 million compared to $29.7 million by the end of the previous quarter, with management saying the drop was due to the normalization of revenue post-COVID-19. Management offered guidance for the fourth quarter featuring revenue between $12 and $14 million, which would be lower that quarters one through three but a record for the company’s Q4 nonetheless.

“Our order backlog reflects that the semiconductor capital equipment market outlook remains both resilient and robust,” Hunton said.

Photon Control’s share price has been up and down in recent years but 2020 has been good so far, with the stock currently up 25 per cent year-to-date.

But Rosenberg expects a lot more upside in the months to come. His $3.00 target represented at press time a projected one-year return of 73 per cent.

The analyst said he likes PHO’s moves to diversify its product offerings.

“Within the Semi space, the company has historically primarily supplied temperature sensors utilized in the etch process, but has made recent efforts to develop high-temperature sensors that can be used in other stages of the fabrication process, namely deposition. In this quarter, PHO made an initial shipment to a major OEM, signalling diversification in its offerings for semi equipment manufacturers,” Rosenberg wrote.

“Notably, the company has made efforts to diversify its line of offerings, supplementing products developed through in-house R&D with accretive transactions such as its recent in-licensing agreement, enabling the company to increase its portion of revenue outside of the highly cyclical semi industry. The agreement provides PHO with an innovative technology that has new-use cases within the semi space as well as applications in several other verticals, such as railway, automotive and medical, to name a few,” he said.

On the third quarter numbers, Rosenberg had been calling for revenue of $14.6 million (consensus was $14.2 million) versus PHO’s $16.3 million and for adjusted EBITDA of $3.4 million (consensus was $4.1 million) versus PHO’s $6.2 million.

Rosenberg said macro trends in cloud computing, 5G, gaming and COVID-related supply chain uncertainties are all supporting continued strength for PHO.

“Cloud infrastructure is in the early stages of transformation as enterprises migrate their systems to the cloud. This has a long-term demand effect for datacenter servers, and the chips inside them,” Rosenberg wrote.

“While [the 5G] theme has been slow to arrive, we finally see commercial phones and infrastructure coming to market. Samsung is pushing into 5G mid-level phones and the iPhone 12 features 5G. Each of these phones requires more sophisticated chips than the current generation of 4G handsets. More of the world is engaging with gaming, thereby creating demand for graphic cards and chips to run them,” he said.

Over the third quarter, Photon Control announced a new distribution agreement with a leading Korean distributor, Woowon Technology, a representative and distributor for over 30 major foreign manufacturers in Korea.

“This agreement provides Photon Control with a proven partner in Korea, the second largest semiconductor market in the world accounting for over 20% of the global market. The partnership furthers Photon Control’s market penetration strategy of strong local support in key markets,” said Photon Control in a September press release.