Photon Control Inc.

Photon Control Inc (TSX: PHO) is an Electronics & Electrical Equipment company. The company is engaged in designing, manufacturing, and distribution of a wide range of optical sensors. These products are used by the world’s largest Wafer Fabrication Equipment manufacturers and end-users in the semiconductor and solid‐state industries.

Recently, the company informed strategic partnership with Fisens GmbH through an exclusive worldwide license and distribution agreement for Fiber Bragg Grating sensor solutions in the semiconductor industry. The partnership will allow Photon Control’s fiber optic sensing expertise and experience in the semiconductor industry to introduce new and innovative products to the market and is expected to enhance the company’s product presence.

Q2FY20 Financial Highlights: PHO impresses with its quarterly numbers and reported both top-line and bottom-line growth, amidst the glitch in the economy. Revenue surged to CAD 16.098 million as compared to CAD 7.106 million in the previous corresponding period (pcp). The increase was driven by higher WFE spending by OEMs in order to improve the semiconductor market coupled with accelerated shipments to customers in response to the COVID-19 pandemic and additional income from the new products. Gross profit stood at CAD 9.722 million, reflecting a growth of 150% on y-o-y basis. Operating income came in considerably higher at CAD 5.797 million against CAD 0.224 million, a year ago, thanks to the higher gross profit and lower general & administrative costs, while higher research & development costs and a considerably higher sales & marketing expense remained a drag. The company posted net income at CAD 2.673 million, as compared to CAD 0.109 million in pcp.

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Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The global semiconductor industry is fast-paced, competitive, and constantly innovating to increase processing speed and power and the group’s inability to match the market dynamics would lead to a loss of clients.

Valuation Methodology: Price/ Earnings Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock surged ~49% and ~75% in the last nine months and one-year, respectively and is currently trading above the 200-days simple moving average (SMA) of CAD 1.35, indicating a bullish pattern. The company witnessed gaining traction from the semiconductor industry and other high-tech industries, backed by higher usage of smartphones, 5G mobile, the cloud, autonomous driving, and artificial intelligence. As a critical building block of these technologies, semiconductors will continue to enable innovation and transform industries, and hence, chipmakers are expected to increase production to meet this growing market. The company has a strong business model and operating in an industry with robust demand. The group designs manufacture and distribute a wide range of optical sensors and systems to measure temperature and position for the semiconductor and other high technology industries. Further, the order backlog at the end of the quarter stood at CAD 29.658 million, up significantly from CAD 10.714 million, a year ago. Higher backlog indicates a higher potential revenue in the coming years. The company is continuing its R&D in innovation and is focusing on new product development, which augurs well for improved customer satisfaction and higher product acceptability. We have valued the stock using Price to Earnings value-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered industry (Industrials) average on NTM basis. Hence, we recommend a ‘Speculative Buy’ stance on the stock at the current market price of CAD 1.58 on August 21, 2020.

PHO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Black Diamond Group Limited

Black Diamond Group Limited (TSX: BDI) is a Calgary-based leading provider of space rental and workforce accommodation solutions. The company operates in Canada, the United States and Australia. The group’s operating segments include Modular Space Solutions (MSS) and Workforce Solutions (WFS).

Q2FY20 Financial highlights: BDI declared its second quarter results, wherein the company posted total revenue of CAD 37.3 million, reflecting a decline of 21% on y-o-y basis. The decline was primarily attributable to a drastic decline from lodging revenue, while rental and non-rental segments reported 9% and 13% drop from the previous corresponding quarter. Modular Space Solutions grew 7% on y-o-y basis, while workforce solutions posted a 43% decline. Gross profit stood at CAD 17.401 million, slightly lower than CAD 17.589 million in the previous corresponding period (pcp), supported by significantly lower direct costs. The company posted adjusted EBITDA of CAD 9.9 million, stood flat as compared to CAD 10 million, a year ago. The quarter was marked by a decline in administrative expenses, depreciation and amortization, share based compensation and finance costs. The net loss declined to CAD 0.4 million, as compared to CAD 2 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Black Diamond's cash generated from operations will be dependent upon future financial performance, which in turn will be subject to financial, business, and other risk factors, including factors beyond Black Diamond's control. At the same time, recent macroeconomic shocks in the form of oil price war and COVID-19 pandemic have presented near-term challenges in parts of the group's platform.

Valuation Methodology: EV to Sales Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock has corrected ~25% so far this year. The Company has a network of local branches rent, sell, service, and provide ancillary products and services to a diverse customer base in the construction, industrial, education, financial, and government sectors. The Company has been focusing on diversifying its asset rental platform, which is likely to support the company’s long-term growth driver. Amidst a major jolt in the economy, the Company has posted stable business performance within space rental and workforce accommodation solutions, which is a key positive. The MSS segment reported growth in its core, recurring, rental revenue, which is encouraging. Within the WFS segment, the company witnessed improved traction across Australia along with increasing revenue generation from mining, infrastructure and disaster recovery customers, aided by the Company's diversification strategy. However, the Company posted a decline from Lodging and Energy Services businesses, which is a drag. The Company has ample liquidity with excess borrowing base availability of ~CAD 76 million, which seems sufficient to weather the current challenging time. The stock closed above the 200-days simple moving average (SMA) of CAD 1.61, indicating a bullish pattern. We have valued the stock using the EV to sales based relative valuation approach and arrived at a target price, which suggests a lower double upside potential (in % terms). For the said purpose, we have considered industry (Home Building & Construction Supplies) average on NTM basis. Hence, considering the aforesaid facts and current price movement, we recommend a ‘Speculative Buy’ recommendation on the stock at the closing market price of CAD 1.62 on August 21, 2020.

BDI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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