Photon Control Inc

Photon Control Inc (TSX: PHO) designs, manufactures and distributes a wide range of optical sensors and systems to measure temperature and position. These products are used in the semiconductor and other high-technology industries.

Investment rationale: 

• Robust performance in Q2 2020: The company clocked the revenues of CAD 16.1 million, a growth of 127% on Y-o-Y basis. Net income came in at CAD 2.7 million, reflects a healthy net income margin of 16.6% for Q2 2020.

Source: Company

• Strong financials:The Company is in a solid financial position and seems to have sufficient liquidity to run the operations smoothly, even in this tight scenario. As of June 30, 2020, cash and cash equivalents were CAD 41.1 million, an increase of CAD 7.7 million in the six months period. The Company’s strong financial performance was the sole reason behind this increase.

• Almost zero debts in the books: With a balance sheet size of ~CAD 74.5 million, the company is having a debt of only CAD 1 million. This means that there is no financial cost burden on the company. In Q2 2020, the company is having a debt/equity ratio of 0.02; this was very low compared to the industry median of 0.37.

• Outperforming the industry on various parameters: The company is beating the industry median numbers on many fronts, some of them are portrayed below.

Source: Refinitiv (Thomson Reuters)

Financial overview of 2Q 2020

Source: company 

• On Y-o-Y basis, the company’s total revenues jumped from CAD 7.1 million to CAD 16.1 million in 2Q 2020. The company witnessed an improved wafer fabrication equipment spending environment and accelerated product shipments which derived this improvement in the revenues.

• On Y-o-Y basis, Gross profit increased from CAD 3.9 million to CAD 9.7 million in 2Q 2020. This helped to realize a gross margin of 60%. Increased sales volume and better product and customer mix were the reasons behind this performance.

• Operating expenses increased to CAD 3.9 million from CAD 3.7 million in 2Q 2019 as the company was maintaining its investments in new product development as well as the group was focusing on new and existing markets.

• Net income for 2Q 2020 was CAD 2.7 million compared to CAD 0.1 million in 2Q 2019.

Upcoming Event

The company will release its 2020 third quarter financial results on 5^th Nov,2020.

Risks associated to investment

The company has a highly concentrated customer base. The top three customers account for approximately 80% of the group’s revenue. As a result, the actions of even a single customer can expose its business and results of operations to greater volatility.

Valuation Methodology (Illustrative): EV to EBITDA

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Semiconductors have revolutionized all aspects of the world, among the technologies today hardly there is any sector which does not require semiconductors in their functioning. So, we expect that the company is likely to increase the production down the line to meet the demand of this growing market. The company also have a positive outlook on continued strong demand for its technology and products. The company expects to post the revenues between CAD 13 to CAD 15 million for Q3 2020.

Therefore, based on the above rationales and valuation, we have given a “Speculative Buy” rating at the closing price of CAD 1.67 on October 23, 2020. We have considered industry (Electronic Equipment & Parts) median for valuation.

PHO daily technical chart. Source: Refinitiv (Thomson Reuters)

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