Photon Control gets bullish new price target at Echelon

Photon Control (Photon Control Stock Quote, Chart, News, Analysts, Financials TSX:PHO) has been on fire recently but investors needn’t be worried, says Echelon Capital Markets analyst Amr Ezzat, as secular tailwinds should keep pushing the stock higher. In an update to clients Thursday, Ezzat reiterated his “Buy” rating and upped his price target from $3.00 to $3.50 for PHO, projecting at the time of publication a total return of 60.6 per cent.

Photon Control is a precision measurement company making optical sensors and systems for the semiconductor industry, with its head office and manufacturing facility in Vancouver, manufacturing, sales and engineering offices in California and a global sales network.

The stock had a fairly quiet 2019 but then really took off in 2020 starting in May and finished the year up 46 per cent. At $2.20 per share, PHO is still a little under its all-time high of $2.40 hit in mid-2018.

The event precipitating Ezzat’s update involved a set of bullish earnings reports, one from industry heavyweight Taiwan Semiconductor Manufacturing Company which just surprised with a large capex boost for 2021 of between $25 and $28 billion, up from $17.2 billion last year. The other came from Samsung who late last week pre-reported what Ezzat called “constructive results” on the back of its semiconductor business.

The analyst, who has nominated Photon Control as one of Echelon’s Top Picks for 2021, described the situation this way: “Despite the remarkable recent stock performance (+43.3 per cent in Q4 2020 and +7.9 per cent year-to-date), we remain bullish on the Company’s short- and long-term outlook. On a more macro level, we continue to be constructive on industry dynamics. Drivers such as e-commerce, gaming, video streaming, AI, cloud computing, IoT and the deployment of 5G networks are tailwinds that will drive additional data centre capacity requirements benefiting Photon.”

Importantly, Ezzat argued the TSMC capex numbers for 2021 aren’t a one-off blip, saying TSMC has assured that the capex spend will be followed by revenue growth. Ezzat pointed to TSMC’s earnings call on Thursday, where CFO Wendell Huang said, “Today, as we enter another period of higher growth, we believe a higher level of capacity — capital intensity is appropriate to capture the future growth opportunities. We now expect a higher growth CAGR in the next few years, driven by the industry megatrends of 5G and High-Performance Computer—related applications.”

Ezzat has upped his estimates due to the bullish reports and is now calling for 2021 sales and EBITDA of $72.9 million and $28.6 million, respectively, as compared to the previous $68.9 million and $27.1 million, respectively, and representing top and bottom line growth of 14.6 per cent and 20.5 per cent, respectively. For 2022, Ezzat is calling for $82.4 million in revenue and $31.6 million in EBITDA.

“We believe Photon’s balance sheet strength together with its leverage to an economic upcycle constitute attractive risk-reward characteristics. Despite the strong stock performance since our late 2015 initiation, valuation remains exceptionally attractive with earnings growth keeping pace with stock performance,” Ezzat wrote.

Comparatively, Ezzat said PHO still looks great, putting its current valuation at 5.8x his 2021 EBITDA estimate and 11.6x his 2021 earnings estimate. “We believe these to be exceptional valuation metrics by any standard. For reference, Tokyo-based Hamamatsu Photonics trades at a whopping 24.0x EBITDA,” Ezzat wrote.

Photon Control last reported earnings in early November where its third quarter 2020 featured revenue of $16.3 million compared to $8.7 million a year earlier and year-to-date revenue of $49.7 million compared to $23.9 million the year before at that time. Q3 EBITDA was $6.2 million compared to $2.4 million a year earlier and for the first nine months of 2020 it was $19.1 million compared to $5.1 million over the same period in 2019. PHO said the uptick in Q3 revenue came about due to an improved wafer fabrication equipment (WFE) spending environment.

“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,” said CEO Nigel Hunton in the third quarter press release.

Hunton said while the market remains uncertain due to the COVID-19 pandemic, the company is in a strong financial position and has continued to show strong operational execution over 2020. Photon Control finished the third quarter with cash and equivalents of $46.6 million, up from $13.2 million at the end of 2019. Its order backlog was $27.0 million at the end of the third quarter compared to $29.7 million a year earlier, with the company saying the year-over-year decrease was “consistent with the normalization of revenue post-COVID-19.”