Photon Control keeps “Top Pick” status at Echelon

It’s shaping up to be another record year for Photon Control (Photon Control Stock Quote, Chart, News, Analysts, Financials TSX:PHO), says Echelon Capital Markets analyst Amr Ezzat, who reviewed the company’s latest quarterly report in an update to clients on Thursday. Ezzat stayed bullish on PHO, reiterating both his “Buy” rating and Top Pick Call on the stock, which he says is currently trading at a compelling valuation.

Vancouver-headquartered precision measurement company Photon Control delivered its fourth quarter and full 2020 financials on Thursday, showing record quarterly revenue of $14.9 million compared to $8.9 million for Q4 2019 and adjusted EBITDA of $3.7 million compared to $2.1 million a year earlier.

For 2020, revenue was also a record at $64.7 million compared to $32.7 million for the previous year and EBITDA hit $22.8 million compared to $7.2 million a year earlier.

Photon, which designs, manufactures and distributes optical sensors and instruments to measure temperature, pressure, position and flow in Wafer Fabrication Equipment (WFE) in the semiconductor industry, said the semiconductor sector is expected to see further growth in 2021. That bodes well for PHO, which offered 2021 first quarter revenue guidance of between $16 and $18 million.

“The business environment for the semiconductor capital equipment market in 2021 continues to strengthen from the record levels achieved in 2020, with continued growth expected in every major semiconductor device market for our products, including the advanced foundry and logic markets, as well as both the DRAM and NAND memory markets,” said Photon Control CEO Nigel Hunton in a press release.

“We enter 2021 in the strongest financial position in Company history, with continued expectations that we will deliver strong operational execution and increase shareholder value in this robust and very healthy business environment,” Hunton said.

PHO made great strides in 2020, with its share price rising 46 per cent last year. So far in 2021 the stock is up a further 22 per cent.

But Ezzat sees more room to run. Looking at the fourth quarter numbers, Ezzat said sales of $14.9 million came out ahead of his forecasted $13.9 million, while EBITDA of $3.7 million was under his call for $4.6 million. The analyst said the lower earnings were due to increased operational expenditures via increased R&D investments to address market opportunities and service its customers.

Looking ahead, Ezzat said PHO’s guidance of $16-$18 million came out ahead of his call for $16.0 million.

“We are reiterating our Top Pick call as we continue to be constructive on industry dynamics,” Ezzat wrote. “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.”

“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,” he said.

On valuation, Ezzat figures PHO to be currently trading at 10.1x and 7.0x his respective 2021 and 2022 EBITDA estimates and 18.4x and 12.2x his respective 2021 and 2022 earnings estimates, which he calls “exceptional valuation metrics by any standard,.” Ezzat said by comparison WFE component suppliers trade at a median of 23.5x next-twelve-months EBITDA.

Other pluses to the name which Ezzat mentioned include PHO’s backlog which remains at near record highs at $30.3 million versus $20.8 million last year, the company’s free cash flow of $2.5 million for 2020 versus negative $1.0 million for 2019 and Photon’s overall cash balance which increased to $48.4 million from $46.6 million at the end of the previous quarter.

Ezzat rejigged his forecast and is now calling for 2021 revenue and adjusted EBITDA of $74.6 million and $22.3 million, respectively, and for 2022 revenue and EBITDA of $87.9 million and $32.4 million, respectively.

“Our longer-term forecasts are also higher as we now give some credit to the Company’s penetration into the deposition segment on the back of its current investments,” Ezzat wrote.

Along with his reiterated “Buy” rating, Ezzat maintained his $3.50 target price, which at the time of publication represented a projected one-year return of 33.6 per cent.

Further to the Q4 press release, CEO Hunton said Photon Control is outpacing the averages among semiconductor capital equipment companies and growing its earnings faster than revenues.

“Compared to industry growth of approximately 18 per cent in 2020, our revenues increased 98 per cent and earnings growth exceeded 500 per cent compared to 2019,” Hunton wrote.

“Our relative outperformance is testament to the enabling role of Photon Control within the global semiconductor manufacturing industry, the strength of our customer partnerships with the world’s leading Original Equipment Manufacturers and the increasing importance of precise control of critical processes at successive technology nodes,” he said.