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IQE has given an update to trading and to the strategic review. Trading has been impacted by continued inventory burn, weakness in wireless and delays to some US military and defence spend, with orders deferred into 2026. They now expect £90-£100m in revenues, EBITDA is now expected between -£5m and +£2m. The scope to the strategic review has been increased to include the sale of whole company, and they are seeking buyers. IQE is in receipt of an approach from a potential offeror at the time of this announcement. There can be no certainty either that an offer will be made nor as to the terms of any offer, if made. The potential sale of the Taiwanese business is progressing with multiple parties, and it is expected, if successful, that the proceeds will leave the business in net cash position. The company is managing the current cash position very carefully. While we are very cognizant of the binary nature of these potential discussions, we retain a Buy rating and lower our target price of 20p, to reflect our reduced estimates.
IQE plc
The UK Government’s Digital and Technology Sector Plan was released this week, with headline grabbing numbers (£1trillion of market value and 186 unicorns). We agree that technology is fundamental to growing the economy. Productivity is after all the only long-term driver of per capita GDP growth. A strong cohort of world class universities places the UK well. Initiatives to drive more capital into the sector are very welcome but pouring capital into private capital while not addressing some of the issues with public markets will dilute this, potentially materially. Not owning our most successful companies delivers returns elsewhere, with notable examples here of Arm and DeepMind both US owned. More direct investment by government particularly for infrastructure is also welcome, but £1bn for a supercomputer does not buy a lot of H100s. Leading edge semi fabs cost $20bn+, advanced EUV lithography tools are $250m each, a leading edge mask is $20m. Focussing on human capital is therefore more important and on that front the recent non-dom moves and the tax rises are not helpful in retaining and attracting talent. Wise moving its listing to US also another unhelpful move. In conclusion we welcome the focus, the direction of travel, and would double down on our human capital and look to improve the UK public markets attractiveness.
IQE CER ALFA CRW
After a profit warning and fund raise in November, and another trading update in January, IQE has released FY24 results. Revenue was £118m in line with the last trading update. EBITDA was £8.1m, a touch better than the £7.5m expected. Net debt was £18.8m. The all-important strategic review is ongoing, with encouraging progress. As part of the Strategic Review, IQE is prioritising the possibility of a full sale of IQE Taiwan, alongside a potential IPO. The key focus of management is to leave the company in a debt free and cash positive position. Post a disposal the company would be a US and European manufacturer focussed on the higher value segments within compound semiconductors. While we are cognizant of the potential risks around such a transformative deal, we retain a Buy rating and 24p target price.
Management remains “encouraged by progress so far despite a challenging macro environment” in executing the strategic review. We view the sale of the Taiwan business as critical to unlocking value. IQE trades on a CY26 EV/EBITDA of 13x, versus peers at 10-20x, and on a CY25 P/B of 0.7x. We remain Under Review.
By enabling higher power density, GaN looks well-positioned to disrupt key industries; the most immediate focus is likely to be on the automotive sector and the additional capability GaN can bring to EV batteries, though other high-growth markets include providing efficient data centre power.
Having recently strengthened its balance sheet with the help of major shareholders and director participation, we believe IQE is now navigating the final stages of the semiconductor downturn. We maintain our Under Review rating until further details of the strategic review emerge.
As we noted in January, IQE is navigating a difficult end-market to unlock value via a strategic review. With cash to support working capital, IQE trades on consensus CY25 0.7x P/B versus direct peers on c.7.0x. We maintain our Under Review recommendation until further details of the strategic review emerge.
Despite industry headwinds, IQE’s management has gained credibility by: 1) delivering against financial expectations; 2) making progress on strengthening the balance sheet; and 3) securing growth vectors. We are hopeful that the semiconductor cycle will turn in 2H and look to reinstate our target price and rating as IQE’s future becomes clearer. For now, we maintain our Under Review target price and rating.
Despite industry headwinds, IQE’s management has gained credibility by delivering against FY24 expectations; outlining a plan to unlock sum-of-the-parts value; and making progress on strengthening the balance sheet. We are hopeful that the semis-cycle will turn in 2H and look to reinstate our TP and rating as the future for IQE becomes clearer.
The Taiwan disposal (PHe EV: c.£160-190m) remains key to unlocking value and giving IQE the runway to position for growth as the market recovers into late 2025. In the meantime, management has reduced the going concern risk. For now, we keep our TP and rating Under Review, awaiting the the path forward becoming clearer.
IQE has lowered guidance today, announced a strategic review and a proposed £15m funding round via a convertible loan note to strengthen the balance sheet, which has been a concern. IQE now expects FY24E revenues of £115m and EBITDA of £5m. PLe was £133m and EBITDA £11m vs consensus Revenue range of £130-134m and EBIDTA range of £11m to £14m. We lower our forecasts on the back of this update and reduce our target price to 24p from 40p as a result, and an assumption that the loan note is converted into shares. We still believe that compound semiconductors have an important place in the semiconductor eco system and that IQE can be a meaningful player in that. We retain a Buy rating.
The offer of a convertible (up to c.£15m with a conversion price of 15p) by a shareholder with a board seat underscores the potential value to be unlocked. Given the evolving situation, we will reassess our TP and reinstate a recommendation in due course. We remain at Under Review. Clearly, risks has been lowered.
The short and to the point wording of the announcement that CEO Americo Lemos has “left with immediate effect” suggests he has been removed by the Board. Mark Cubitt, who joined recently as Chair-elect will become Executive Chairman; CFO Jutta Meier also takes over as interim CEO. Both have strong finance backgrounds in the semiconductor industry. The shares have reacted negatively as there will be questions around this given the sudden departure. We believe management near-term priority is cost and asset optimisation. We expect the latter to include the sale of the Pennsylvania site alongside the IPO of the business in Taiwan. IQE has also applied for CHIPS act funding. The shares now trade below book value, and we believe the company owns valuable assets in UK/US and Taiwan.
The semis cycle has worsened in recent months, delaying IQE’s end-market recovery. IQE’s consensus CY25E P/B is 1.1x, below the sector median of 2.5x (LandMark and VPEC, c.7x). Despite the discount, we move our rating and TP to Under Review whilst we re-assess our stance.
Following its trading update in July IQE released interims today. Revenues were a touch better, but guidance has been lowered to the bottom of range, in line with PLe estimates. Cashflow was quite weak as they built some inventory, however this should be easier in H2. They expect to sell their old site in Pennsylvania in H2. The potential Taiwan IPO, potential CHIPS act funding and ongoing underlying recovery should all help the balance sheet over the next 6–12-month period. Whilst SIA data has been recovering since May 2023 and was the catalyst for our upgrade last July, the recovery has not been uniform, and we are seeing quite a variance across the sector and the peer group. This means that H2 is going to see more moderate growth. We leave our forecasts and target price unchanged and retain a Buy rating.
The AI revolution (see iPhone launch) is driving demand for compute. In the coming years this should shift to connectivity (source: Broadcom) and power (source: Global Foundries). In essence, into IQE’s sweet spot. With the 1H25 Taiwan minority IPO on track, we remain long-term Buyers (61p TP), despite near-term end-market volatility.
We believe Taiwan will account for c.30% of group FY24E revenue, and is one of the more profitable entities within the group. We think IQE Taiwan will compare favourably versus VPEC, both financially and structurally. Given it is very early days, we do not quantify the impact on valuation, but expect it to be positive. We reiterate Buy and our 61p TP.
IQE is an operationally geared (semis are at a cyclical nadir) and geographically hedged (sites across the US, UK and Taiwan) play on compound semiconductor (CS) manufacturing. As key end-markets such as mobiles, delayed opportunities like 5G-infra, and nascent markets including AI-focused datacentres drive volumes, we think, IQE’s CY25E EV/sales of 2.1x looks undervalued versus the broader peer-group on 3-5x.
In April, IQE noted that 2H23 momentum had carried into FY24. While some in the ecosystem have noted a softness in CQ2 vs CQ1, we believe IQE’s 1H24 results will be in line with market expectations. Big catalyst remains a material deal announcement. In the interim, our DCF-derived TP provides upside, and our P/B versus direct peers provides a margin of safety. We reiterate our Buy rating and 61p TP.
IQE knows that meeting investor expectations is a must; thinks the range of sell-side FY24 forecasts is reasonable, and stands by its CMD targets for FY27, which are ~$650m (~£520m) revenue & 30% EBITDA margin. Its confidence has multiple underpinnings, some of which we note below. IQE remains
IQE’s FY23 results were in line with January’s trading update. The shares had been weak into these results and there is relief that the recovery is coming through. SIA data has been improving for some time and IQE call out this recovery. It was the turn in this data that was the catalyst for our recommendation upgrade last July. IQE saw H2 revenue improve 21.7% on H1. IQE’s Q1 trading is in line with management’s expectations, and FY24E is set to be within the range of analyst forecasts. Management actions to improve efficiency and diversify the customer base are also coming through. We believe that IQE is making progress on signing all-important outsourcing contracts. We leave our estimates and target price unchanged. We are currently the bottom of the range. We retain our Buy rating. The results today were broadly in line with the January trading update, with EBITDA very slightly better as is the balance sheet. The commentary and guidance provide significant relief. We make no material changes to our forecasts and introduce our estimates for 2026. SIA data has improved and though the latest release last week for February 2024 saw a 3.1% decline MoM, the YoY growth was 16.3%. The exact timing of how this flows through to IQE is difficult to call, but the commentary in the release and the half- on- half performance confirm we are past the bottom of this cycle. IQE has significant underutilised capacity and as revenue recovers, we estimate the contribution margin will be c60%. Improving utilisation is an important driver of share price performance in the semiconductor sector. CEO Americo Lemos has been fighting on many fronts, and the evidence of this action is evident. The senior team has been significantly strengthened with a number of important hires. New CFO, Jutta Meier, presented the financials in the results meeting. She joined from Intel having previously worked at GlobalFoundries and AMD. They have acted on costs and optimised their manufacturing capacity. They are diversifying their revenue and have made strategic investment in GaN. We believe they are making progress on outsourcing contracts. IQE called out several design wins within the press release and they are leveraging their partnership with AWSC to gain share in the Android ecosystem, reducing their dependency on Apple. The main risk going into these figures was a delay in the recovery and the resulting pressure this would have had on the balance sheet. The guidance allayed this somewhat. We also believe that IQE’s presence in US/UK and Taiwan opens us three potential sources of non-dilutive funding. IQE’s strong position supplying US defence companies makes the CHIPS act the most likely in our view. As the required performance scales further in 5G and other new products, the performance vs cost trade-off is shifting in favour of compound semis. The IQE roadmap to develop larger wafer sizes mirrors one of silicon's critical cost reduction levers. Combining the need for ever-higher performance and better scale is a tipping point for IQE. IQE should benefit from this and an increased level of outsourcing. The extent to which semiconductor manufacturers who currently insource wafers outsource to IQE is a key potential driver. IQE is currently trading on an EV/Sales multiple of 2.0x. The shares are discounting higher revenues and better margins, given the historically weak profitability. However, there is a significant upside if IQE can hit their medium-term revenue of $650m and 30% EBITDA margins targets. The operational gearing within IQE is significant, given the underutilised capacity. We retain our Buy.
In Sep-23, IQE anticipated double-digit revenue growth in 2H FY23 vs. 1H FY23 - it delivered 22%. Also, FY23 EBITDA & period-end net debt reported today are meaningfully better than the numbers IQE pre-announced in Jan-24. Looking ahead, the company expects FY24 sales & EBITDA to be within
Putting fears of a lengthy correction to rest, IQE flags the “[ strengthening] order book [will] continue through 2024, despite [macro]”. Market share gains in Wireless, and increased confidence in GaN power qualification underpins this positive stance. IQE trades on 12x FY25E consensus EV/EBITDA: volume recovery should drive upgrades to the denominator. We reiterate our Buy rating and 61p TP.
IQE released a trading update last week, which provided some relief after a very difficult 2023, where a significant industry inventory correction saw material cuts to forecasts. Revenue for 2023 is now expected to be a least £115m, we were on £109m. EBITDA is in line, net debt was broadly in line. More importantly H2 grew more than 20% on H1. SIA data has been recovering for many months, and January’s release for November 23 was YoY growth of 5.3% and MoM growth of 2.9%. We upgraded in July on the back of 3 months of improving SIA data, we now have had 9 months of recovery, with November the first period of YoY growth. Utilisation is a key driver in semiconductor stocks. IQE is probably the most geared to a recovery in utilisation within its universe. New CEO Americo Lemos’ strategy of looking to drive increased outsourcing sales, moving into GaN power and MicroLED should start to deliver enhanced top line performance. We retain a Buy and target price of 40p. In its FY23 pre-close update, IQE expects that its revenue for the period will be at least £115 million, a more than 20% increase from H1 to H2 of 2023, in line with the guidance previously issued. The company expects this to translate into an adj EBITDA of at least £3 million, with a net debt position of approximately £3 million. According to Americo Lemos “We made significant progress implementing our diversification strategy, expanding our customer engagement pipeline, and securing multiple design wins in GaN Power and MicroLED markets. Our strategic investment in GaN capacity in 2023 is anticipated to unlock further opportunities throughout 2024.” Americo Lemos has managed to navigate through a significant downturn while implementing the new strategy, diversifying the revenue base and building capability in GaN power. We expect to hear more on this at the full year figures. Utilisation is a very important driver of profitability in semiconductors, and we watch the SIA data closely (a chart on page 2 illustrates the ongoing recovery here). IQE has significant fixed costs within its COGS due to its manufacturing capacity. So while the reported gross margin is very low, the leverage to upside is significant. Our gross margin model suggests a c60% contribution margin vs c15% gross margin reported in FY22. IQE also announced the appointment of new CFO Jutta Meier. Her background includes senior roles at Intel Corporation, where she served as a Senior Finance Director for Intel Foundry Services, contributing to the company's Foundry business transformation. Previously, she held the position of Vice President of Finance at GlobalFoundries Inc and has also worked in various capacities at Advanced Micro Devices Inc. (AMD). This is further evidence of the continuing upgrade of IQE’s team. At this stage the only change we have made to our estimates is for the FY23 revenue. We remain below consensus for FY24 and will review that at the full results release. As the required performance scales further in 5G and other new products, the performance vs cost trade-off is shifting in favour of compound semis. The IQE roadmap to develop larger wafer sizes mirrors one of silicon's critical cost reduction levers. Combining the need for ever-higher performance and better scale is a tipping point for IQE. IQE should benefit from this and an increased level of outsourcing. The extent to which semiconductor manufacturers who currently insource wafers outsource to IQE is a key potential driver. IQE is currently trading on an EV/Sales multiple of 1.6x. The shares are discounting higher revenues and better margins, given the historically weak profitability. However, there is a significant upside if IQE can hit their medium-term revenue of $650m and 30% EBITDA margins targets. The operational gearing within IQE is significant, given the underutilised capacity. IQE is trading close to book value. It is of note to us that IQE is at the bottom of all our financial, valuation and performance KPIs versus its peer group. Simply put, they have fared the worst in this downturn; the gearing to the upside from here is significant in our view. We retain our Buy.
IQE delivered good 2H FY23 financials, continued to expand into adjacent markets, and filled the Group CFO post with a finance exec who has held senior positions at global semiconductor companies for >25yrs. In Sep-23, IQE expected "double-digit" sales growth in 2H vs. 1H FY23, and "to be profit
While we make no changes to our FY24E numbers, we believe the momentum will carry into 2024, with further upside potentially coming from the 2023 GaN investments. As we chart overleaf, downstream CS fabs are seeing MoM recovery, helped by the inventory correction bottoming out in the broader sector. Given this backdrop, a recovery multiple of 20x CY24E EV/EBITDA feels like a bargain to us.
Interims results were in line with the trading update, having seen significant cuts to expectations during the half. The £52m reported revenue was down 40% YoY as the savage inventory correction in semiconductors hit them hard, generating losses through the P&L. While FY23 guidance leads to further forecast cuts, there are signs of light. IQE talks to things stabilising, with pockets of recovery, notably the July SIA data was the fourth month in a row of recovery. We upgraded in July on the back of the improving SIA data, we believe we are at the bottom of the semi cycle. IQE has significant underutilised capacity and therefore has significant operating leverage. New management has been very proactive on costs, balance sheet and importantly a market focused GTM. We believe that significant outsourcing contracts are possible. We retain our Buy and target price of 40p.
For 1H FY23, IQE reported revenue/EBITDA/net cash at period-end of £52.0m/-£5.7m/£5.3m, in line with our recently-revised estimates of £52.4m/-£6.0m/£5.0m. This aggregate outturn shows IQE is managing costs and cash tightly, biding time for the current market-wide softness to end. Looking ahead, IQ
A deep inventory correction and semis-related geopolitics have left cyclical end markets at a nadir. Progress on management’s push to diversify (GaN for DCs and Autos, new Asian wireless customers, wider use of VCSELs, etc) should position IQE better into the market recovery. With 2024E expectations still intact, a P/B (adjusted) of 0.65x provides a margin of safety for a strategic asset.
We continue to believe the semis sector is the place to be for the next cycle. Our premise is that there is a value shift from software to hardware. NVIDIA’s rise, despite AI’s software centrality, validates our thesis. We continue to believe in a more central role for IQE, with demand for greater performance and power efficiencies rising as AI permeates the world.
Meeting Notes - Aug 29 2023
IQE plc Vistry Group PLC
Major IQE customers report that continuing macro softness is delaying correction of elevated stock levels across the semiconductor industry, so product shipments will keep trailing end-market demand until the turn of 2023. If the macro backdrop improves by then, end-market demand will bounce back t
We hosted a positive meeting with Americo Lemos, CEO of IQE. This follows IQE's trading update for H1 last Thursday. After a torrid industry inventory correction, we were relieved that H1 was in line with the guidance. We upgraded to Buy in July because we believe the semi-cycle has reached a trough. IQE is at a tipping point in terms of its market and position. The roadmap for larger wafers is significant in our view. We are Buyers with a target price of 40p.
China export restrictions re-enforce the strategic importance of compound semiconductors (CS). With sites across the US, Europe and Asia, IQE remains the only pure-play, outsourced, CS-epitaxy provider that can help OEMs onshore their strategic supply across the globe. We believe consensus CY23E P/B of 1x does not reflect the value of this strategic asset.
OSB Group : I Fled Rates Speedily Analysts -Rae Maile+44 (0)20 7886 2860 &Ross Luckman+44 (0)20 7886 2532 The company’s unscheduled trading update has some good news – loan book growth continues apace, NIM is slightly better than expected, costs are lower – but also has a particular sting in the tail. The rapid increase in base rates, and consequent increase in mortgage rates, means that customers seeing previous fixed rate deals end are moving much more rapidly to refinance than the company had expected. There is an “accounting adjustment” of up to £180m to be taken in H1/23E. While brutal relative to estimates, this is essentially a quirk of accounting, not a “loss” but the headline is uncomfortable to say the least. The next question is the degree to which this means gross new business has to step up to deliver anticipated net loan book growth. The shares are cheap and the company will continue to buy its own shares, but this will hardly help sentiment. Importantly we see no read-across to Paragon Banking Group (BUY). Read More... Zinc : More mine closures ahead? Analyst -Kieron Hodgson+44 (0)20 7886 2773 Zinc has experienced a difficult year and is now trading 40% below its peak in May 2022. A decline in manufacturing and construction activity, resulting in lower demand for galvanised steel, are key factors at play. That said, a supply-side response, in the shape of mine suspensions is an industry tactic previously applied to shield against declining prices. So, whilst we were prepared for lower prices in our last publication, the 18% decline in Q2 was materially more than we expected, but any further mine closures will provide for a more positive price outlook. Read More... Lithium : Demand growth returning Analysts -Edward Gooden+44 (0)20 7886 2775 &Kieron Hodgson+44 (0)20 7886 2773 A pipeline of new supply has been released, incentivised by last year’s high prices, and we expect supply to continue to grow from here. Demand improved considerably in May and June, especially in China and we see potential for continued demand growth in H2 and into 2024, and as such our forecasts sit ahead of consensus. Our longer-term outlook for the lithium price is positive. We believe supply can rise to meet demand, and enough lithium is available, but that supply response will generally lag behind demand growth, supporting prices. Read More... MaxCyte Inc. : 21st SPL agreement signed, 3rd in 2023 Analysts -Dr Julie Simmonds+44 (0)207 886 2743 &Dr Mike Mitchell+44 (0)207 886 2761 MaxCyte has signed a Strategic Platform License with Lyell Immunopharma for use in developing its T cell product candidates targeting solid tumours. This takes the number of SPL’s to 21; we expect further partnerships during 2023 adding to the three signed to date. In addition to progression of the broader pipeline, MaxCyte’s lead partnered programme exa-cel has the potential to be approved during the year, with a December 8th PDUFA date. This is likely to be transformational for the company. We maintain our 786p target price and BUY recommendation. Read More... Scancell Holdings : Pipeline strategy and business update Analysts -Dr Mike Mitchell+44 (0)207 886 2761 &Dr Julie Simmonds+44 (0)207 886 2743 This morning, Scancell has announced a strategy update and commentary across its SCIB1/iSCIB1+ SCOPE clinical trial and the ModiFY trial of Modi-1. Both campaigns continue to progress, with some extremely encouraging data highlighting the potential of the opportunity with both monotherapy and combination strategies. We outline the expected news flow to be generated across these lead clinical programmes in the near-term, while noting that Scancell’s increased focus on these lead assets will now provide for an extended cash runway to H2 2024 (previously Q1 2024). We expect this to now cover a number of key data readouts and cohort expansions. We will be updating our forecasts and investment thesis in light of recent updates, and in the meantime reiterate our Buy recommendation. Read More... IQE : It’s a long way to the top Analyst -Harvey Robinson+44 (0)20 7886 2744 We upgrade IQE to Buy. The Semiconductor Industry Association monthly sales for May showed the 3rd month in a row of monthly increase; while modest, this looks like a trough. The ISM has, at least for now, stabilised. IQE is the worst performer in its peer group on most metrics and is, therefore, most geared to the upside. The recent £31.1m fundraise was very welcome. Notably, the CEO put in £1.5m. New management has been sweeping through the business and is focused on securing meaningful outsourcing contracts. If they deliver, there is a meaningful upside to base revenue. What semi-strategy the UK has is quite focused on compound semis, and IQE can also benefit from other Govt funding such as the CHIPS act. Read More...
IQE MXCT SCLP OSB
We upgrade IQE to Buy. The Semiconductor Industry Association monthly sales for May showed the 3rd month in a row of monthly increase, while modest this looks to us like a trough. The ISM has, at least for now, stabilised. IQE is the worst performer in its peer group on most metrics and is therefore most geared to the upside. The recent £31.1m fund raise was very welcome, notably the CEO put in £1.5m. New management has been sweeping through the business and is focused on securing meaningful outsourcing contracts. If they deliver there is a meaningful upside to base revenue. What semi strategy the UK has is quite focused on compound semis and IQE can also benefit from other Govt funding such as the CHIPS act.
Meeting Notes - May 30 2023
IQE BT/A CCH TEP WTB BOY BME BAKK BMY
Post detailing FY22 results and raising c.£31m earlier this month, we think IQE is materially closer to showing it is worth well in excess of its current share price. This is irrespective of whether the global semis market starts to recover early or late in 2H FY23. We have revised our forecasts to
We review the results and discuss the opportunity for IQE. With the CEO (£1.5m) and the ex-CEO (£1m) both participating in the raise, we believe the return potential on the investment agenda is very real. With a UK semis strategy imminent, IQE should have wind in its sails. Buy, TP 61p.
IQE has reported its FY22 results, updated guidance for FY23, announced a share placing and an extension of its $35m revolving credit facility. The FY22 results were broadly in line with consensus. The placing at 20p has raised £30m with an open offer for another £3m, which will increase the share count by 18.6%, or 20.4% if the retail offer is fully taken up. IQE has proactively moved to strengthen the balance sheet, a necessary step given the high level of uncertainty in the market. The H1 revenue guidance of £50-56m compares to the £56m guide in March. H223 needs to be similar to H222 to hit market consensus, which is where management are guiding. The H2 rebound is where the questions focused on during the analyst call and is a risk. We adjust our target price to 40p to reflect the higher share count, and for now, we remain on the fence with a Hold rating.
RPi makes a single-board computer called Pi (c.$40 ASP), originally launched to promote CompSci in schools and since finding a huge following in the hobbyist movement. Its commercial arm is positioned for an impressive B2B opportunity, which today accounts for c.70% of RPI’s revenues and, importantly, taps into the smart factory opportunity.
IQE has updated the market again, the second trading update in 2023. Having reduced expectations for FY22 and cautioned on H123 in January, IQE on Thursday has given a significant warning for H123. The inventory correction is biting even harder than initial expectations. WSTS data showed Jan fell 19% YoY, and handset markets both for devices and infrastructure are worse. H123 is expected to be £30m below H122, which was £86.2m. This is 35% down. They do expect H2 to see a return to YoY growth, but there is clearly further risk to numbers. We now forecast higher net debt (£39m, their facility with HSBC is £55m). We cut our bottom of the range forecasts and reduce our target price to 48p (55p) to reflect higher levels of debt. We retain a HOLD rating despite the 37% fall in shares, as we want to see signs of a turn in fundamentals.
IQE's second warning since Jan-23 snapped investor attention back to the here and now, and jarred their confidence in its strategic value. IQE's near-term prospects are being hit by an industry-wide rather than a company-specific issue: value chains have not corrected over-stocking fast enough. In
IQE at its CMD made clear that all the positive strategic steps will only translate to growth and margin from 2024 onwards. The depth of the 2023 inventory correction (MoM global semis sales dropped 5.2% in Jan) is a surprise. We do think near-term forecasts should not distract from the value creation medium-term. We revise our TP from 85p to 61p.
Twenty years ago, having visited IQE in Cardiff, my learned colleague suggested on the train back that we did not need to worry about IQE for a while. The most recent profit warning has created a significant pullback in the shares after a decent H2 2022 performance. The capability of silicon to deliver the required performance levels is increasingly challenged from a technical perspective. The November CMD was positive for the medium-term opportunity and set ambitious targets. We expect lead indicators to improve in Q2/Q3, which usually presents a good entry point for semi-stocks. We initiate with a Hold and a Target Price of 55p and will revisit when the FY22 results are announced.
World macro conditions caused IQE to deliver, we think, -2% YoY revenue change in FY22 (LFL), rather than our forecast +4%. For the same reason, and based also on our monitoring of what IQE customers said in the last 1-2 months, we now expect +5% sales growth in FY23, vs. +9% before. We advise inve
We remind ourselves why one should buy into the sector selectively in the midst of an inventory correction, noting how the structural tailwinds (east-west bifurcation, 5G, autos, supply-security contracts, etc) boost the upside risks to CY24/25E. While IQE shares have done well recently, despite very near-term headwinds, given the capex flexibility, we remain bullish.
Integrated – While the rhetoric is all about the east-west split of the semiconductor supply chain, the reality is that it is near impossible to unbundle integrated supply chains near-to-medium term. Growing – Easier access to voluminous data (eg 5G), and the ability to process (eg AI) is unlocking new use cases that are rapidly expanding the market, particularly in the autos and imaging markets. Adapting – Covid enabled the market to re-assess norms like just-in-time inventory, price>supply-security, to the benefit of manufacturers. Semicon 2022 provided a fantastic insight into the complex world of semiconductors, with speakers across the value-chain that included public (IQE#, Alphawave, Sondrel) and private (XMOS) investment opportunities. In this note we present video clips from the key sessions. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oliver.Tipping@peelhunt.com Click below to watch clips from the key sessions Sector Outlook: Tim Pullen and Mark Lippett IQE#: Tim Pullen (CFO) Sondrel: Graham Curren (CEO) Xmos: Mark Lippett (CEO) Alphawave: Jose Cano (Head of IR) #Corporate client of Peel Hunt
It is hard to do justice to the energy on display at the CMD by summarizing the event. That energy is why we walked away feeling incrementally bullish about IQE’s opportunity to capture more of the value in CS epitaxy as it takes advantage of the ongoing decoupling of the semis ecosystem.
The current end-market uncertainty (including geopolitical supply risks) is what great management teams are good at taking advantage of. From what we believe to be a Sony win, to partnerships like AWSC, IQE appears on a roll to capture more share, leaving the company in a far stronger position for 2024E+.
A supply agreement to unlock market share gains AWSC (8086.TWO) is an epiwafer fab, like WinSemi, that sits downstream from IQE. It supplies wafers to the likes of Skyworks and Richwave for mostly mobile and WiFi applications. Historically IQE has supplied AWSC on an adhoc basis but the new three-year supply agreement will mean the relationship should become more predictable. Our read here is that IQE is now starting to aggressively encroach on VPECs home turf. We understand Americo is in Taiwan as we write this and IQE’s market share gain story continues apace. With major forex tailwinds, we expect upgrades are very likely. Buy. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com
IQE has signed a 3-year deal with Advanced Wireless Semiconductor Company (AWSC), a Taiwan-based manufacturer of compound semiconductor chips. We think this agreement gives IQE good scope to grow its share of the supply chains serving manufacturers of mid- and low-tier mobile handsets in Asia, and
A global consumer electronics leader based in Asia has signed a multi-year supply deal with IQE starting immediately. The deal is focussed on IQE's high-volume production of VCSEL epiwafers for 3D Sensing chips (e.g. for 'Face ID'). The partners will also engage in joint R&D for next-gen sensin
New VCSEL customer for 3D sensing Using pubic sources, we posit that IQE has won Sony as a VCSEL customer. Sony already makes CMOS modules for Apple, and is reported to become the third VCSEL supplier alongside Lumentum and II-VI. Like Lumentum, Sony is likely to have turned to IQE for the epitaxy, given Apple’s quality and quantity demands. This should see IQE’s position strengthen in the Apple ecosystem, given it now supplies two of the three Apple suppliers in the 3D sensing VCSEL value chain. Sony might also open up other VCSEL opportunities (eg Metaverse). With strategic delivery on track, we reiterate our Buy. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com
In May, IQE partnered with Porotech to enter the microLED market. In June, it struck a multi-year supply deal with Lumentum. Last week, it made another microLED deal, this time with MICLEDI Microdisplays. Today, IQE unveiled a partnership with SK siltron (part of the SK Group, S. Korea's 2nd larges
Strategic collaboration to unlock the GaN opportunity IQE is keeping to its strategic goals of customer (S. Korean 5G infra) and product (Power electronics, e.g. EV) diversification, and in doing so, has de-risked its growth opportunity in the Asian region. The strategic agreement with S. Korea’s second-largest conglomerate announced today, and the comment by SK siltron CEO, is in keeping with the promise by IQE CEO to lay high-level foundations to elevate the growth opportunity. Within the note, we posit why this could result in major value creation into 2024 and beyond through the unlocking of a new OEM. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com
Post IQE's detailing of its 1H FY22 results earlier this month, we have changed our forecast of revenue mix in FY22 in line with guidance, but our USD-denominated total revenue estimate remains unchanged (Tables 1 & 2). We also reshaped our forecast of c.15% revenue CAGR to FY26: we now expect
Meeting Notes - Sep 06 2022
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Despite the challenging macro & geopolitical backdrop, YoY revenue change was slightly better than that pre-announced (+1.4% vs 0% at CC) & IQE re-iterated its FY22 sales guidance of low single digit % growth at CC, despite recent warnings from customers like Lumentum & Qorvo. In additi
In-line 1H22 results, accelerating strategic momentum 1H22 revenue is up 1% CER vs 1H21 and 8% vs 2H21, with EBITDA flat on a CER basis; all in line with expectations. Pleasing InP recovery (+43% CER) and GaN strength (+56%) compensated for flat VCSEL and macro-impacted GaAs; benefits of a great portfolio. Balance sheet remains healthy with 0.5x net debt to EBITDA, and guidance remains unchanged. While we make no forecast changes, the strategic progress (eg new customer engagements up 3x) is better than we had anticipated at this juncture. Given this, and the P/B value of just 1.1x vs semis-peers on >5x, we remain bullish on the stock. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com 2-page note
Meeting Notes - Aug 23 2022
IQE COST LOOK
IQE has scope to prove good progress in pursuing sustained value growth, without 'stealing the thunder' of its CMD in Q4 2022. For example, note that some existing customers trimmed their near-term expectations recently, yet, last month, IQE reiterated its guidance of "low single digit % revenue gr
No longer a pushover IQE has filed a lawsuit against Tower Semiconductor (ticker TSEM, market cap $5bn) claiming the use of IQE’s trade secrets to obtain patents. The “significant evidence” to back up the claim includes breach of contract. We believe this relates to RF switching related Porous Silicon tech. While too early for quantifications and timelines, we make a few observations: the technology in question could de-throne Soitec’s RF-SOI dominance (worth c.$0.5bn annually); and the outcome can only ever be positive in our view given we had not factored in RF switches to our investment case. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com
1H22 trading update – FY expectations de-risked IQE delivered 7% headline growth in 1H22 versus PHe FY22E of 1%. Given the FX tailwind, IQE maintained its guidance for low single-digit CER growth. This, we believe, de-risks FY consensus expectations: a big positive in the current environment. IQE has also outperformed its Asian peers, which could imply market share gains. While returns on the new strategic steps by Americo Lemos will not be immediate, it is now clear that there is a solid revenue base to drive 2023/24E upgrades, despite macro headwinds. The current P/B at 0.9x provides significant margin of safety given peers are on 4.6x. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com
Meeting Notes - Jun 30 2022
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The semiconductor industry changed fundamentally in the last c.2 years, IQE's tech pedigree and differentiating capabilities are very suited to the New Normal, and its recently-arrived CEO has the experience and top-level industry contacts to help IQE monetise value that is likely a multiple of its
Americo Lemos, CEO since Jan-22, has begun to leverage his top-level industry contacts to help IQE monetise its likely significant strategic value. The company has signed a multi-year, high-volume agreement to supply Lumentum with its knowledge-intensive compound semiconductor (CS) wafers for 3D se
Broadening and deepening the Lumentum relationship While seeing Lumentum on an IQE release is a definite first, more impressive was to see a quote from the Lumentum CEO flagging the importance of IQE; a clear signal that IQE CEO Americo Lemos is not wasting any time in delivering on his promise of deeper relationships. Lumentum was an existing customer, and the agreement expands the scope to new growth vectors (LiDAR), and – importantly – locks in multi-year commitments from Lumentum. While likely upgrades are more medium term, in the nearer term these greater commitments should enhance the perceived earnings quality outlook for IQE. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com 2-page note
It’s time to take a closer look at IQE When we took up coverage of IQE, flagging the importance of compound semiconductors to the revolution that was being unlocked by 5G rollouts, EV adoption, etc, we could not foresee the headwinds from the US-China trade-war and Covid supply shocks. The opportunity that moved to the right is now closer, and the broader semis supply chain disruptions will trigger positive changes to the value chain. We reflect on a recent site visit to IQE, and suggest that now is the best time to get closer to the story again. The biggest catalyst, in our view, is the arrival of the impressive Americo Lemos as the new CEO. Buy. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com 6-page note
Edison Investment Research is terminating coverage on Avon Protection (AVON), Osirium Technologies (OSI), IQE (IQE), Kopy Goldfields (KOBY) and RhoVac (ROHVAC). Please note you should no longer rely on any previous research or estimates for this company. All forecasts should now be considered redundant.
Yesterday IQE announced the world's first commercially available 200mm VCSEL wafer. This is materially bullish for IQE's NPV prospects because, as the company's release noted, "200mm wafers will enable a step-change in unit economics for compound semiconductors, leading to the expansion of the mark
IQE's very irregular past is likely a poor predictor of its future now Americo Lemos leads its ROI-focused top team. Compared to its relatively few rivals, IQE's range of complex and enabling products is market-leading and markedly wider, and IQE is alone in having fabs in all 3 leading continents.
IQE hosted a confident in-person meeting to review its FY21 results and introduced Americo Lemos, its new CEO since Jan-22. Based on his CV, what he said during his presentation, and how he answered questions, we think Mr Lemos has good scope to unlock value well in excess of that implied by IQE's
FY21A – new CEO teases a great strategy Results, while slightly ahead, contained no surprises given the Jan trading update, and we make no changes to our recently updated FY22E forecasts. Focus will be on the results presentation, where the new CEO Americo Lemos will tease the outline of his plans for IQE ahead of a more detailed strategy in 2H. At half the CY23E EV/Sales rating of the broader peer-group, we think this semis stock presents a unique opportunity in the UK market, with near-term risks finely balanced. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com 2-page note
Putting more Apples into the basket We sense that after three years of volatility, IQE is turning a corner. While a recovery in GaN (related to wireless infrastructure spend) and GaAs PAs + VCSELs (pent-up demand from mobile upgrade cycle) are potential upside scenarios, we are keen on the pragmatism of the new CEO. No one questions the broader opportunities across sensing (consumer 3D, defence, etc) and power amplifiers (5G, EV, etc). It is more about IQE’s ability to replicate its VCSEL-Apple success elsewhere. We reset our expectations awaiting the new CEO’s vision. The stock is extremely attractive. We decrease our TP from 103p to 85p. Buy. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com 3-page note
Meeting Notes - Mar 15 2022
IQE TCAP CRH SHI WIL GEN ZIG CBG INF AMS FEVR IGG IPO LSL RTN GYM RG8
Later this month, IQE will detail FY21 results, outline its prospects for FY22, and formally introduce Americo Lemos, its new CEO since Jan-22. Its pre-close Update in Jan-22 confirmed that IQE's performance in FY21 was in line with that foreseen by its profit warning in Nov-21. Based on what key c
IQE’s share price has fallen by over 30% since FY21 guidance was reduced in November. However, we believe the downgrade relates primarily to supply chain issues in the smartphone industry, which are likely to be resolved during FY22, rather than any loss of market share. The group is therefore likely to return to growth as the handset and 5G infrastructure markets recover, potentially supporting a share price recovery too. Moreover, new CEO Americo Lemos’s extensive network of relationships with global semiconductor manufacturers is likely to lead to more long-term strategic collaborations such as the one with GlobalFoundries announced in October, supporting stronger-than-market growth in the medium term.
FY21: In-line trading statement IQE’s trading to December 2021 was in line with the November update. Revenue of £164m (FY20: £178) was 17% above the pre-pandemic FY19 level, reflecting both the near-term volatility and the medium- to long-term growth in the company’s end markets. Net debt of just c.£6m (PHe £9.4m) reflects the enormous progress Tim Pullen has made on the cash side since joining. If initial impressions are to go by, we have high hopes Americo Lemos will do the same on the growth side of the equation. We reiterate our Buy and 103p TP. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com
IQE has announced that year-on-year growth in the volumes of GaAs epiwafers was lower in Q421 than it had expected. We believe this relates to supply chain issues in the smartphone industry, which are likely to be resolved during FY22, rather than consumer demand for handsets. We have changed our estimates in line with revised management guidance, cutting FY21 PBT from a £0.1m profit to a £9.2m loss, and our FY22 PBT estimate from a £7.3m profit to a £4.7m loss.
IQE profit warned this morning, and this happened just two days after the company announced the materially good news that a well-connected businessperson will become CEO on 10-Jan-22 (link). We think today's unwelcome news is mainly because silicon chip shortages are holding back 5G handset manufac
Disappointment highlights the importance of new CEO We had assumed flat CER growth for FY21E. IQE now expects CER growth of -8%, driven by end-market malaise rather than share loss. Given -2% FX since our update, we downgrade revenue by c.10% and EBITDA by c.33%. However, we believe that better market-oriented thinking, and deeper and more proactive engagements could mitigate some of this volatility in the future. This is exactly why we are excited by the new CEO, who we expect to drive the front-end changes required to enhance earnings quality. While our DCF-derived TP falls from 121p to 103p, we remain convinced of the medium term. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com 2-page note
Americo Lemos, aged 54, will become IQE's CEO on 10-Jan-22. He has >20 years of managerial experience working for multinational technology companies such as GlobalFoundries (GF), Qualcomm and Intel. His last role was SVP for GF, a $33bn market cap semiconductor manufacturer, responsible for grow
New CEO announcement ticks all the boxes Americo Lemos joins IQE as the new CEO from the $33bn GlobalFoudries, having seen through its IPO at end-October, which explains the delay to this announcement. He headed APAC business development there and was also China country president. Couple that with two decades of experience across a number of IQE clients (Skyworks, etc) and he brings the most sought-after attributes for the role: ability to grow and strengthen profitable relationships. He has long admired IQE’s positioning and is keen to build it to its true potential. While success will not be overnight, IQE now has all the ingredients in place. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com
IQE has announced that it will be closing its Singapore site by mid-2022 and transferring activity to its sites in North Carolina and Taiwan. The move will generate estimated annualised cash cost savings of c £4.8m so we have revised our FY22 estimates, raising adjusted EPS by 8%. Importantly it helps create an optimised platform for pursuing volume opportunities for MBE epitaxy used for long-wavelength VCSELs and healthcare applications.
Pushing forward with the efficiency agenda IQE is pushing forward with its agenda for greater efficiencies across its manufacturing footprint. Intention to close the Singapore site by mid-2022, which uses MBE as opposed to MOVCD machines, is in line with this agenda. By transferring the IP+Assets to Taiwan and US sites, it maintains the strategically important global footprint while getting closer to bridging the margin gap with single-site operators. A positive c.£1m favourable impact on income is expected through cost savings (a c.£3m revenue reduction vs c.£4.8m opex savings). We make no changes to our earnings forecasts for the time being. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com
Meeting Notes - Sep 17 2021
IQE RTN CLIN AHT DNLM ZIG STCK WIL
This note explains why we believe that IQE remains attractively priced at this level, and is nearing a big, positive value inflection. Our stance reflects our research of IQE, and our continuous tracking of its likely top-3 customers and several other associated companies. Following IQE detailing i
IQE’s H121 results are in line with management guidance given in March that H121 revenue and EBITDA would be similar to H120 levels on a constant currency basis. However, currency headwinds resulted in an 11.5% year-on-year reduction in revenues and a 28.9% drop in adjusted EBITDA. Noting that the recovery in demand for epitaxy for 5G infrastructure applications is not now likely until FY22, we have revised our FY21 estimates, cutting PBT from £2.5m to £0.1m, while leaving our FY22 estimates unchanged.
1H21 – good news on the CEO search The results release confirmed the expected trends for 2021, with strength in smartphones/WiFi/etc related GaAs compensating a lack of growth in photonics (eg VCSELs) and 5G infra volumes due to deployment timing. The big positive, in our view, is IQE’s identification of the new CEO candidate, bringing the process closer to completion. Importantly, the requisite semis experience to sell IQE capabilities at a CxO level downstream has been met, complementing the operational excellence Tim Pullen brings to the table. With market growth about to inflect, we believe all the important pieces are now almost in place. Reiterate Buy. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com 2-page note
IQE notes that H121 trading was in line with management expectations. The company expects H121 revenue will be c £79m on a reported basis. This is consistent with the guidance management issued in March that H121 revenue and EBITDA would be similar to H120 levels on a constant currency basis because H121 revenue is equivalent to c £87m (constant currency), which is close to the £89.9m revenues reported in H120. Management also expects adjusted EBITDA to be similar to the prior year at constant currency (c £16m versus £16.4m H120). We leave our estimates, which depend on an H2 recovery in infrastructure revenues, unchanged.
Yesterday, IQE reported that 1H FY21 financials were in line with guidance, and the search for a new CEO is at an advanced stage. We remain confident IQE is set to profit handsomely from (i) several 5G-driven S-curves (5G network rollouts; 5G handset take-up; launch and take-up of numerous other/ne
FY21 trading update: no surprises For 1H21, CER revenue of c.£87m (1H20: £89.9m) and CER adjusted EBITDA of c.£16m (1H20: £16.4m) were broadly in line. The implied currency headwind of c.10% is no different to our expectation. In our recent note (Oversold 5G opportunity), we discussed at length why 2022/23E should turn out to be the start of a multi-year structural growth runway for IQE. Today’s update removes any near-term uncertainty for those looking to buy into that, given the depressed share price. We reiterate our Buy rating and note the “advanced stage” of the CEO search as being the near-term catalyst. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com
Oversold 5G opportunity With roll-outs finally gathering pace around the world (as evidenced by recent spectrum auctions), we are now convinced of the long-awaited ex-China 5G ramp. We reflect this with a 9% FY22E earnings upgrade. However, with currency a strong headwind (USD is -9% in 1H21) we reduce our FY21E forecast, maintaining an unchanged view for flat CER growth. We remain convinced of IQE’s strategic importance, as more domains embrace compound semis in a balkanised supply chain. We believe the announcement of the new CEO will be the near-term catalyst to get the shares rallying. Buy, TP 121p reiterated. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com 16-page note
Meeting Notes - May 26 2021
IQE AMGO FERG ATG OMG KGF SCT VANQ CCR BYIT GYM STJ BLND AJB ASHM BOY DMGT GLV INCH LMP PETS OSB DELRF
Tim Pullen, CFO, briefed our sales team. As a consequence, we remain confident that (i) IQE is very good at what it does and the entry barriers to its business are high; (ii) it will continue to benefit from significant and enduring tailwinds (e.g. 5G and IoT), and (iii) the company is becoming eve
We initiate coverage of IQE with a Buy rating and a TP of 110p/share; +93% vs the last close. At a minimum, and in contrast to that the current share price implies, we are confident IQE will resume growing at pace after FY21, and that it has significant operational leverage. The risk to our forecas
As flagged in IQE’s January trading update, FY20 revenue rose to a record £178.0m, taking the company from an adjusted operating loss of £4.7m to £5.4m profit. This excellent performance was the result of 5G roll-out boosting demand for IQE’s epitaxy in both infrastructure and handsets, combined with consistent demand for photonics epitaxy from IQE’s longstanding VCSEL customer. While these favourable trends have continued into FY21, we are cutting our FY21 revenue estimate by £8.3m and PBT by £9.5m to reflect the strengthening of sterling against the US$.
FY21E results – Stepping into the 5G mega cycle Given the Jan update, the results did not surprise. Trading remains positive in 2021. As expected, there is some timing uncertainty around near-term GaN-on-SiC demand otherwise IQE seems incrementally bullish on GaAs demand for 5G PAs and sees no risk to the anticipated ramp in 3D sensing. While the margin impact is somewhat hedged, the headline impact at spot-FX is a headwind. While guidance calls for a flat 1H21, we wait for clarity on FX volatility before touching FY21E revenue. With tailwinds now well-established, we remain convinced IQE’s strategic value is underappreciated by the market. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com 2-page note
Marching towards a cleaner slate IQE has announced the settlement of an IP dispute, in which it received payment of U$2.5m. This follows a tribunal award entirely in IQE’s favour. In FY18 and FY19, IQE recognised exceptional costs of £1.3m and £4.3m, respectively, in respect of the dispute. We view this as part of IQE moving forward, and it also validates our view of IQE’s IP edge. Having digested recent commentary from II-VI, AMS, Qorvo, Win Semis, Lumentum, Skyworks and Macom, we continue to believe IQE is now on a multi-year growth curve, which will start driving upgrades. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com
IQE has announced it expects FY20 revenues to be c £178m. This is ahead of our estimates, which we revised upwards in November, reflecting outperformance in both the wireless and photonics segments. We have updated our FY20 forecasts. Given IQE’s leveraged business model, this results in a 64% uplift in EPS. Noting the uncertainty about the effect of a pandemic-related recession on the rate of smartphone sales growth, we leave our FY21 estimates unchanged for the time being.
FY20E trading update With revenue (+2% vs PHe), and by implication profits (+4% vs PHe), coming slightly ahead of expectations, we are now confident that IQE has turned a corner. Talking to management, we sense a heightened level of confidence. That said, despite most trends going the company’s way in 2021, some areas like the GaN-SiC could still be volatile. 2021 will likely see markets look beyond the volatile past to the medium-term opportunity. This will help bridge IQE on 3.6x CY21 Sales vs VPEC on 6.7x and LandMark on 9.1x. With the new CEO search progressing, we reiterate our Buy stance given a positive industry outlook. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com
The breadth of IQE’s technology portfolio and ability to serve compound semiconductor chip customers in the US and Asia puts it in a good position to benefit from rising demand for compound semiconductor applications for 5G and connected devices. Infrastructure roll-out appears relatively unaffected so far by the coronavirus pandemic. Global handset shipments are expected to pick up in 2021, potentially stimulated by new ‘must-have’ AR apps enabled by 5G connectivity and world-facing time-of-flight (ToF) devices, supporting a trebling of PBT in FY21.
IQE has announced that the strong performance in H120, which resulted in record first-half revenue, has continued into the second half. It has updated FY20 revenue guidance from at least £165m to over £170m, with adjusted EBIT guidance remaining at the mid-single-digit million level. We have updated our FY20 and FY21 forecasts accordingly, giving adjusted PBT upgrades of 34% and 10% for FY20 and FY21 respectively.
IQE’s revenues grew by 35% year-on-year during H120 to a record £89.9m, taking the group from a £1.9m adjusted operating loss in H119 to a £4.3m adjusted operating profit. We upgrade our FY20 estimates in line with management’s guidance. The resultant 15% revenue upgrade changes the outcome from a loss to £3.1m adjusted PBT.
IQE has announced that it expects H120 revenues to be at least £85m. This is 27% higher than H119 and a record first half performance. Despite this encouraging start to the year, we leave our estimates unchanged given the prevailing uncertainty regarding the impact of the coronavirus pandemic on global handset demand.
IQE has released its audited FY19 results following the comprehensive trading update in March. We leave our estimates unchanged after the 6% revenue downgrade in March since in IQE’s case the impact of COVID-19 on global handset demand is likely to be softened by gaining share in both the wireless and photonics markets. While the full effect of the coronavirus on the global economy and thus on demand for IQE’s epitaxy remains to be seen, management notes that Q120 was slightly ahead of internal expectations and the outlook for Q220 remains positive.
Yesterday’s trading update confirms that IQE’s FY19 results will be in line with the revised guidance it provided in November when the full extent of the impact of the US-China trade war became visible. We have cut our FY20 revenue estimate by 6%. In IQE’s case the impact of COVID-19 on global handset demand is likely to be softened by gaining share in both the wireless and photonics markets. However, the full effect of the pandemic on the global economy and IQE’s business remains to be seen.
The breadth of IQE’s technology portfolio and ability to serve compound semiconductor chip customers in the US and Asia puts it in a good position to benefit from rising demand for compound semiconductor applications for 5G and connected devices. The share price has been hit by the shift to Asian-centric supply chains caused by US-Chinese trade tensions, and resultant reductions to management guidance. Although the timing of a recovery is difficult to gauge, we see scope for earnings recovery as IQE secures additional contracts in Asia and leverages its IP portfolio into sustainable profit growth and cash generation.
IQE’s reduced guidance for FY19 revenues of £136–142m (vs £140–160m previously) reflects primarily the greater than anticipated disruption to its major US wireless customers as a result of the US/China trade war. There is good evidence to support a recovery in the medium term: the qualification of products and tools in the Asian supply chain for both 3D sensing and wireless RF is encouraging, while exposure to 5G remains attractive. However, the timing of a recovery is difficult to gauge and with Q120 expected to be seasonally quiet we downgrade our FY19 and FY20 revenue estimates by 5.3% and 15% respectively, with FY19 EPS reduced from a 0.5p profit to a 0.8p loss and FY20 EPS reduced from 2.3p to 0.3p.
IQE has acquired the third-party shareholdings in its CSDC joint venture in Singapore for a nominal fee. This gives it control of the operation, which is currently loss making, enabling it to restructure the business and focus it on emerging sales opportunities in Asia for molecular beam epitaxy (MBE)-based products. Short term, the deal has a negative impact on earnings. We reduce our FY19 and FY20 EPS estimates by 8% and 5%, respectively.
IQE’s CFO, Tim Pullen, discusses the company’s recent interim results and explains the operational measures IQE has put in place to support growth. He also explains why it is well placed to adapt to shifts in the global electronics supply chain being brought about by US/Chinese trade sanctions. With the infrastructure phase of the capacity-expansion programme nearing completion, he explains why future investment in capacity will be much more linear and discretionary, based on anticipated demand. As a result, supported by recent cost-control measures, the company expects to generate cash in H2. With an increased debt facility in place, management is confident it will not need to raise further capital. Tim ends by discussing how management sees margins evolving and how investors should view the timing of the company’s growth opportunities across multiple different applications.
As flagged in the June trading update, IQE’s H119 performance was affected by wireless customers cutting back inventory levels in response to lengthening mobile phone replacement cycles and the ongoing trade war between the US and China. Encouraged by the successful qualification, commencement of initial production and receipt of additional orders of wireless products destined for Asian supply chains, as well as the commencement of initial vertical cavity surface emitting laser (VCSEL) production for a second major customer at its new foundry in Newport, Wales, management has reiterated its FY19 guidance. We therefore leave our estimates unchanged.
IQE has recently announced the successful qualification, commencement of initial production and receipt of additional orders of wireless products destined for Asian supply chains, as well as the commencement of initial vertical cavity surface emitting laser (VCSEL) production for a second major customer at its new foundry in Newport. The share price has risen by 29% following the announcements, which demonstrate that IQE’s dominant position in the outsourced compound semiconductor epitaxy market gives resilience to reduced demand from individual customers.
The US Department of Justice said on Tuesday that it's opening a broad antitrust review of big tech companies, sending shares of Amazon, Alphabet and Facebook lower in extended trading. While the DOJ didn't disclose specific company names, it's launching the review based on "New Washington threats" from Facebook, Google, Amazon and Apple, according to a report by the Wall Street Journal. Snap shares surged more than 12% in after-hours trading on Tuesday after the app developer reported quarterly results that soared past analysts' estimates. The company, which is the maker of Snapchat, posted a slimmerthan-expected loss for the second quarter while exceeding expectations for user growth and revenue. Texas Instruments provided some relief that a global slowdown in microchip demand would not be as long as feared, posting quarterly profit and revenue that beat Wall Street estimates on Tuesday. Shares of the company rose 6.4% to $127.70 in extended trading and were on track to open at a record high on Wednesday.
In this video CFO Tim Pullen, who joined IQE in February 2019, discusses his early impressions of the business as well as its medium- to longer-term outlook. He explains why management remains confident that there will be an inflection in demand for compound semiconductors and the initiatives that IQE has implemented across photonics/3D sensing, wireless and other applications to capitalise on this. He also discusses the benefits that management expects to generate from the optimisation and investment in the company’s manufacturing facilities, and the path to profitability and cash generation from here.
IQE has cut its FY19 revenue and profit guidance in response to reduced demand from wireless customers and an internal issue affecting a major photonics (not VCSEL - vertical cavity surface emitting laser) customer. Following a 25% share price fall, the shares are trading within the range created by photonics peers on most metrics.
IQE has assessed the potential impact on its business of the decision by the US Department of Commerce’s Bureau of Industry and Security to prohibit the sale to Huawei, by certain of IQE’s customers, of products covered by the Export Administration Regulations without obtaining an appropriate export licence. Following discussions across its customer base, IQE estimates that its current maximum risk exposure with regards to this ban is less than 5% of its total FY19 revenue guidance. We therefore leave our estimates and indicative valuation of 91–99p/share unchanged.
As flagged in its post-close trading update, IQE’s FY18 performance was severely affected by a short-term dip in production for one of its volume VCSEL programmes. While this does not affect the medium-term prospects for photonics growth, which are based on multiple VCSEL opportunities, management has downgraded FY19 guidance, primarily reflecting short-term softness in the handset market, which it expects will recover during H219. We cut our FY19 EPS estimate by 40%.
IQE’s post-close trading update shows that the short-term dip in production for one of its volume VCSEL programmes had a more severe impact on FY18 performance than management originally estimated. Although we are cutting our FY18 EPS estimate by 10.6%, we note the underperformance compared with management’s guidance given in November appears confined to FY18. Importantly, it does not affect the prospects for photonics growth in the medium term, which are based on multiple VCSEL opportunities. Our revised estimates give an indicative value of 73p/share.
IQE is benefiting from multiple megatrends as it supplies epitaxy for the photonics chips that transmit data in the volumes required for full adoption of the Internet of Things and provide the accurate visual information required for autonomous vehicles, Industry 4.0, augmented reality and virtual reality. This is driving a second wave of growth, with an estimated 66% increase in PBT forecast between FY16 and FY19. Our DCF analysis indicates that the share price is undervalued if photonics growth resumes in Q219 and is sustained over a five-year period, in line with management guidance.
IQE has announced an immediate slowdown in shipments of VCSEL wafers, which materially affects FY18 revenues and profitability, and has issued revised guidance. Although we have cut our EPS estimates by 43% and 24% for FY18 and FY19 respectively, we note this is a short-term problem that does not impact the prospects for photonics growth in the medium term. Our revised estimates give an indicative value of 73p/share.
Azalea Energy—oil and gas production and development company based in Louisiana, United States. Net production of 13 MMcfe/D (2,200 boepd) and total 1P proved reserves of 91 Bcfe (15.1 mmboe), 2P reserves of 111 Bcfe (18.5 mmboe) raising up to $38m, expected mkt cap over $100m. Due Oct Summerway Capital investing company established to acquire companies or businesses which the directors of the Company believe have the potential for strategic, operational and performance improvement so as to create shareholder value. Offer TBC, market cap TBC expected 19 October Admission is being sought as a result of the proposed RTO of Cambian Group plc following completion of the acquisition by CareTech a leading provider of specialist social care services, supporting adults and children with a wide range of complex needs. No raise, market cap TBC expected 19 October. PetroTal (TAL.TO) - The exploration and production company focused on oil assets in Peru is seeking a secondary AIM quotation before the end of 2018. Path Investments— First acquisition of a 50 per cent. participating interest in the producing Alfeld-Elze II gas field located 22 kilometres south of Hannover in Germany. Seeking £10m raise. Due late Oct Green Man Gaming—pure play e-commerce and technology company in the digital video games industry. revenue CAGR growth of 26.7% in the last three years to £47.5m. Due Mid October 2018. EBITDA Profitable. Offer TBA Crossword Cybersecurity PLC* (NEX:CCS)—the technology commercialisation company focusing exclusively on the cyber security sector is exploring its options in relation to a potential move to the AIM market of the London Stock Exchange which, if it were to proceed, would likely take place over the next few months.
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During H118 IQE experienced double-digit sales growth on a constant currency basis in each of its three primary markets, although this was partly offset by a currency headwind. The investment in multiple VCSEL qualifications and the Newport foundry depressed margins, but underpins management’s expectations of a sustained photonics ramp-up in H218 and FY19. Acknowledging the currency headwind and one-off H118 photonics costs, we revise our estimates downwards.
IQE (IQE LN) Momentum good heading into pivotal H2 | Surgical Innovations Group (SUN LN) CE mark validation indicated for Cellis range | UDG Healthcare (UDG LN) Acquisitions/disposal a wash, but Ashfield Clinical & Commercial drags
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IQE’s post-H118 close trading update notes the group continues to trade in line with current market expectations. Importantly, it comments on a significant increase in photonics revenues from product qualifications, underpinning management’s expectation of a photonics ramp-up in H218 and FY19. We raise our revenue estimates slightly but otherwise leave our forecasts unchanged.
IQE (IQE LN) First NanoImprint Lithography order received | StatPro Group (SOG LN) Increasing FY19 EPS 3% to reflect acquisition, TP raised to 228p |
IQE plc Statpro Group
Here are my slides from the talk I gave at the brilliant Mello 2018 Investor Show. The main theme of the talk was what is wrong with the current landscape, and how it is shifting three months into MiFID II. To demonstrate what is broken I analyse events around the IQE short attacks in early February. It is a perfect example of the huge information asymmetry between private investors and institutions, and one obvious solution to help close that gap.
IQE’s FY17 results confirm that the photonics volume ramp-up referred to in the pre-close update has delivered the strong growth in revenues (16%) and PBT (18%) that was expected. Based on management’s guidance for this growth trend to continue, we upgrade our FY18 estimates and note the potential for sustained growth over the next three to five years.
IQE has released its results for the year to December ’17. While the results themselves are strong, these were largely flagged at the trading update in December, and we see the FY’18 and FY’19 outlook as more important for the share price from here. The group expects continued growth in wafer sales, driven by both the expansion of existing business and qualifications of new business streams. Given the group’s strong operational gearing, we expect this to lead to a steady expansion in group margins. The group has given explicit forward guidance for the first time, which is in-line with our FY’18 revenue and EBIT forecasts, although a higher non-cash tax charge is likely to lead to EPS downgrades. With further high growth expected in FY’18 and the potential for more strong growth in FY’19 and beyond, we retain our positive stance.
IQE is a leading global supplier of advanced semiconductor wafers that are used in various applications ranging from mobile communications to industrial power. The company boasts a diversified global customer base and a unique IP portfolio with over 150 patents that enables the firm to provide a unique service to its customers. Headquartered in Cardiff, Wales, IQE shares were often misunderstood or underappreciated by investors in the past. However, as the company continued to deliver healthy growth winning volume contracts for new technologies (e.g. VCSEL), the share price nearly tripled in 2017 and the company successfully placed new shares raising £95m in November. Recent reports published by funds with short positions questioning IQE’s accounting with regard to profit and cash flow contribution from its joint ventures sent the stock price down by 45% from its November high. That said, the company rejected the allegation with the statement saying that the information in the short sellers report is “either factually inaccurate or has previously been disclosed in IQE’s annual reports and financial statements”. The company also appointed KPMG as a new auditor replacing PwC as of 12th February saying “the company holds itself to the highest standards of transparency, governance and integrity”. We find the management responses were timely and expect the share price to be stabilised going forward.
Block Energy—a NEX Listed UK based oil exploration and production company whose main country of operation is the Republic of Georgia, looks to join AIM end of February 2018. Offer TBC OnTheMarket—Intention to float on AIM to raise c.£50m which will be used to fund the growth of the OnTheMarket.com portal, already the third biggest UK residential property portal provider. Offer raising £30m at 165p with mkt cap of £100m . Due 9 Feb.
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IQE’s pre-close trading update noted that management expects FY17 revenues to be ahead of market expectations. Noting that the upgrade is driven by delivery of volume epitaxy on a programme that we infer is the new iPhone X, a programme which will continue throughout FY18, we raise our revenue estimates for both FY17 and FY18, but keep EPS numbers unchanged as the proportion of licence revenues in the mix is lower.
IQE’s full year trading update confirmed that the anticipated VCSEL ramp up is driving upgrades to all forecast years. The Photonics division is on track to achieve c.100% revenue growth, well ahead of our prior 50% forecast. Total FY’17 revenue is expected to be at least £150.0m, with adj. PBT c.4% ahead of expectations despite a reduction in high margin licence income. We expect the strong growth in Photonics to continue, resulting in c.17% adj. PBT upgrades in FY’18. With the number of devices containing IQE’s VCSEL technology set to expand, and further volume increases likely from the group’s other technologies, we retain our 181p TP and Buy recommendation.
IQE (IQE LN) VCSEL ramp up drives upgrades | Summit Therapeutics (SUMM LN) Licence agreement with Eurofarma for Latam rights to ridinilazole
IQE plc Summit Therapeutics Inc
IQE’s full year trading update shows strong wafer sales, with the anticipated ramp up in VCSEL wafers leading to outperformance versus full year expectations. Revenues are now expected to be not less than £150m, with PBT ahead of expectations despite lower licence income. We continue to believe that IQE has secured a valuable position in the VCSEL wafer market, providing a strong platform for further strong growth in FY’18 and beyond. IQE was a key pick for 2017 and has served us well (+310%). We expect further outperformance in FY’18 and retain our Buy recommendation and 181p target price.
Bodycote (BOY LN) Outsourcing agreement providing additional HIP capacity | IQE (IQE LN) Photonics growth drives upgrades as expected
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Apple announced yesterday that US optical components manufacturer Finisar (NASDAQ: FNSR) will receive $390m from its Advanced Manufacturing Fund. The award will be used to increase Finisar’s R&D spending and high-volume production of VCSELs. We had always expected Apple to dual source VCSEL components when possible, so we see the fundamental IQE investment case as unchanged on the back of the investment, however we are highly encouraged by the accompanying commentary on Apple’s Q4’17 VCSEL volumes. We believe that IQE is the only volume source of VCSEL wafers currently available. IQE was one of our key picks for 2017 and has served us well (+325%). With a recently strengthened balance sheet and further positive newsflow expected, we remain highly positive on the stock and retain our Buy recommendation.
IQE has announced its intention to raise up to £95.1m (gross) through a placing of up to 67.9m new shares at 140p/share. The funds will enable IQE to expand capacity to support multiple VCSEL volume ramp-ups from FY19 onwards. We expect the share issue to be earnings neutral in the near term, and are encouraged by this signal of confidence from management as it prepares for the next step change in output.
IQE has announced a placing at 140p to raise c.£95.1m. The new funds will enable it to scale the business to take advantage of the growth opportunities in 3D sensing and other mass market opportunities. The group has also confirmed that if the current VCSEL ramp continues on its current growth curve, there is potential to exceed current FY’17 expectations. Our published bull case scenario shows the potential for 81% upgrades to FY’18 EPS and we believe this placing is indicative of demand for IQE’s products well in excess of our current forecasts. The new tools bought with the funds from this placing are unlikely to deliver material revenue until FY’19, however, we expect previously announced capacity increases to enable significant upgrades in FY’18. With continued strong newsflow likely we believe the shares remain attractive and retain our positive view on the stock.
IQE has announced that during the course of a routine US tax filing exercise, unexpected prior year taxes due of c.£4.2m have been discovered. The identified taxes date back to 2013, when the group acquired the epitaxy business of Kopin. As a result of the September ’16 group re-organisation, it is believed that no similar tax liability arises in 2017. Alongside this announcement the group has confirmed that the VCSEL ramp up in Q3 is on track, giving us confidence in our full year forecasts. We do not expect to make any material changes to estimates and remain positive on the stock, with multiple programs expected to drive significant upgrades to our FY’18 estimates and beyond.
Dechra Pharmaceuticals (DPH LN) AGM statement confirms all in line | IQE (IQE LN) Unexpected historic US tax bill | PCI-PAL (PCIP LN) Continuing compliance with PCI DSS and new contract win | Renold (RNO LN) Forecasts trimmed to reflect H1 update | SDL (SDL LN) CMD highlights: Technology key to long term competitive advantage
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Towards the end of H117 one of the numerous development programmes for photonics applications that IQE has been working on moved to volume production. The programme, which we infer relates to 3D sensing in the iPhone X, potentially has a transformational impact on IQE’s performance. Until there is clarity on the rate of roll-out of the new phone however, our estimates, which are unchanged from the trading update in July, model a cautious ramp-up in IQE’s epitaxy sales. The share price is looking for performance substantially ahead of this, which our scenario analysis suggests is achievable. Importantly, even if demand for the iPhone X is muted, IQE is engaged in multiple photonics development programmes with the potential to generate transformational levels of growth.
IQE’s trading update confirmed that it has secured multiple, multi-year contracts for VCSEL wafers, which we believe relate to 3D sensing opportunities, the most high profile of which is the 10th anniversary iPhone. We are upgrading our FY’17/’18/’19 EPS forecasts by 5%/6%/10% respectively however we believe these forecasts remain very conservative. Assuming a more optimistic level of adoption for the expected new iPhone results in a bull case scenario of 81% EPS upgrades in FY’18. IQE is one of our Key Buys for 2017, a stance which has served us well so far (+185% YTD). With forecasts conservatively struck and multiple additional near-term opportunities outside of Apple on the horizon, we believe the shares will continue to perform. We increase our target price to 147p and retain our Buy recommendation.
IQE’s pre-close trading update notes a 16% year-on-year increase in wafer revenues in H117, driven by strong double-digit growth in photonics and currency tailwinds. Importantly, the photonics growth heralds the start of a mass-market ramp up in VCSEL (vertical cavity surface emitting laser) wafers for consumer applications, encouraging management to proceed with plans to substantially expand capacity ahead of anticipated demand in H218. We make modest upwards revisions to our estimates, noting the potential for further upgrades as there is greater clarity on photonics volumes.
Carador Income Fund (CIFU LN) CLO new issuance and reset activity continues | eg solutions (EGS LN) Strong H1 drives full year upgrade | Howden Joinery Group (HWDN LN) Successful NPD/pricing see pick up in recent LFLs, but risks growing | IQE (IQE LN) Photonics ramp up begins in earnest | Nichols (NICL LN) Strong interims and an accretive deal
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Today we publish our H1 review of our Best Ideas for 2017 – the document in which we also outlined our key top down and bottom up investment themes for the year. Our 12 top picks in January were Cineworld, Elementis, Herald Investment Trust, Hill & Smith, IQE, MySale, Redde, ReNeuron, RhythmOne, SDL, Servelec and Severfield which have collectively outperformed the wider market by 13% YTD. At the half way stage we retire Cineworld and Hill & Smith from the portfolio (both were moved from Buy to Hold in May after outperformance), to be replaced by CVS Group and Renold. We also give a brief update on the rationale for our picks.
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Best Ideas 2017 - H1 Review A strong H1, CVS Group and Renold added for H2 | Gresham Technologies (GHT LN) Significant North American CTC win | Murgitroyd Group (MUR LN) Positive trading update confirms significant H2 improvement | Oxford BioMedica (OXB LN) Debt facility refinanced | RhythmOne (RTHM LN) Adding to the proposition and scale | SQS Software Quality Systems (SQS LN) Hi in line, suggesting recent growth concerns overblown
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IQE’s FY’16 results are c.4% ahead of our expectations, which were upgraded in December. Group revenue grew 16% to £132.7m (N+1Se: 130.8m), with adj. PBT rising 17% to £20.6m (N+1Se: £20.4m) and adj. EPS up 15% to 3.0p (N+1Se: 2.9p). The key Wireless and Photonics markets grew strongly (up 15% and 43% respectively), while licence income outperformed expectations at £6.7m (N+1Se: £5.0m). We expect the positive momentum to continue, prompting c.5-10% EPS upgrades, although we see scope for more material upgrades over the course of our forecast horizon. IQE is one of our key picks for the year. The shares have risen 45% YTD but with today’s results triggering upgrades and further positive newsflow expected, we believe there is more to go for. Buy.
IQE’s diversification strategy delivered a 17% jump in adjusted profit before tax during FY16. Strong growth in photonics revenues was a key element of this improvement. This was boosted by a return to growth, albeit modest, in the wireless sector and weak sterling. We revise our FY17 estimates upwards to reflect the progress made on customer qualifications for photonics applications, and we introduce FY18 estimates.
In this new product we present some strategy theme updates arising out of our latest analysis of macro trends and economic data and our innovative Quant work. We also look at upcoming events and suggest topping up on some of our Best Ideas for 2017.
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We have refreshed our momentum style screen for the first time since inception on 26 July 2016. As before, the screen selects the 25 stocks exhibiting the most extreme momentum characteristics, according to our measurement method. From these we have selected 10 to focus on. Since inception the screen has underperformed both the main small-cap and micro-cap indices against a background of generally rising momentum. We have noted a subset of the basket, where decelerating momentum at the time of measurement appears correlated with significant share price falls since selection. We shall monitor this factor with the new screen, albeit there are only two such stocks showing this pattern, namely Lamprell (not rated) and Gear4music (not rated).
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Today we publish our Best Ideas for 2017 - 12 stocks that we believe have excellent prospects in the current year together with a detailed discussion of what we see as the key sector and market themes for 2017. Our top picks are Cineworld, Elementis, Herald Investment Trust, Hill & Smith, IQE, MySale, Redde, ReNeuron, RhythmOne, SDL, Servelec and Severfield.
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IQE has announced that it will exceed current market expectations for both FY16 revenue and adjusted operating profit. This is primarily driven by strong growth in the photonics business, with a helping hand from sterling’s weakness, and highlights the benefits of IQE’s diversification strategy. We upgrade our FY16 and FY17 estimates, while maintaining a conservative stance and raise our valuation range from 40-45p to 45-49p.
BOOHOO.COM PLC (BOO LN) Positive trading drives upgrades as hoped, PLT acquired for £3m | BURFORD CAPITAL LTD (BUR LN) A gorilla is born | IDOX (IDOX LN) Growth you can count on | IQE PLC (IQE LN) Strategic acquisition and strong FY results | NCC GROUP (NCC LN) FY’16 ahead of expectations | REDCENTRIC PLC (RCN LN) Weak FY’17 confirmed, underlying business sound
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IQE’s ability to apply its epitaxial IP to multiple market segments enabled it to deliver strong profit growth during H116 as the business continues to diversify revenues. This diversification is set to continue, with technology innovations delivering strong growth in photonics applications and taking IQE into new segments such as the high-growth power electronics market. We see scope for further upward re-rating driven by continued growth in photonics sales.
IQE announced a strong set of interim results on Tuesday with all business segments showing good growth. Wireless revenues grew 7% y-o-y, but the higher value Photonics segment continues to be the primary growth engine, up 45% y-o-y. Revenue diversification continues to increase, with non-Wireless sales now 31% of the group total. We make no major changes to our P&L forecasts, with the implied H2 weighting looking conservative going into the traditionally stronger second half. IQE shares have risen strongly since the trading update in July, but trade on just 9.6x Dec’16 PER which we believe remains attractive. We increase our target price to 35p (25% discount to international peers) and retain our Buy recommendation.
IQE’s interim results show continued progress with growth in all business segments. Group revenue grew 18% y-o-y to £63.0m with adjusted operating profit up 61% to £10.8m. The Wireless segment grew 7% but strong growth elsewhere saw dependence on this market continue to reduce (now c.69% of revenue). Photonics continues to be the growth engine, with revenue up 45% in the period. While this rate of growth in Photonics may not be sustainable in the long term it leaves the group very well placed to meet our full year expectations. Good cash generation saw continued reduction in group leverage (net debt plus deferred consideration) although increased capex will result in an increase to our net debt expectations for the full year. The shares have performed well since the trading update in July but still trade on an FY’16 PER of less than 10x. We believe this remains attractive and retain our Buy recommendation.
IQE’s diversification strategy has delivered a 71% jump in adjusted profit before tax during H116. Strong growth in photonics revenues was a key element of this improvement. This was boosted by a return to growth, albeit modest, in the wireless sector and contribution from licence income. We leave our estimates broadly unchanged, noting that this further confirmation of growth through diversification should support a continued upwards re-rating of the shares.
IQE’s ability to apply its epitaxial IP to multiple market segments is expected to deliver year-on-year revenue growth of over 15% for H116. In yesterday’s trading statement, management states that the group is on track to achieve full-year expectations. We leave our estimates unchanged, noting that this confirmation of growth through diversification should help catalyse an upwards rerating of the shares.
IQE has announced that during March it has received record volume purchase orders, worth just over $3m, in its Infrared division. This follows on from the $3.7m Infrared purchase order from a leading global substrate manufacturer in January. Separately the group has announced that it has joined a €15m project to establish a mid-infrared photonics supply chain. The project will be funded by the EU Horizon 2020 program and the Swiss Government and IQE will provide a volume source of mid infrared laser epitaxial wafers. IQE has a leading position in the Infrared market and we expect steady growth over the medium term, however revenue declined c.4% in FY’15 due to the lumpier nature of the market. We are encouraged by the strong start to FY’16 and believe our FY’16 forecasts are well underpinned. The shares are trading on an FY’16 PER of 7.6x but we believe there are multiple catalysts for a re-rating. We retain our 29p target price and Buy recommendation.
IQE’s final results last week highlighted the increased diversification within the business. Well documented weakness in the smartphone market resulted in a contraction in Wireless revenue. In previous years this would likely have resulted in the group missing expectations but increased diversification allowed it to make up for the shortfall elsewhere. Group revenue grew 2% to £114.0m (N+1Se: £117.8m) with adjusted operating profit growing 8% to £19.0m (N+1Se: £19.2m). We make no material changes to our FY’16 and FY’17 forecasts and introduce FY’18 forecasts showing 18% EPS growth. The shares trade on just 7.4x FY’17 PER but we believe there are multiple catalysts to drive a re-rating. We retain our 29p TP (10x FY’16 PER), Buy.
IQE has released its full year results for the year to December 2015. Revenue of £114.0m (N+1Se: £117.8m) and adj. EPS of 2.6p (N+1Se: 2.6p) were in-line with expectations. Cash generation was strong resulting in net debt reducing to £23.2m (N+1Se: 24.2m). As previously announced, weakness in the smartphone market led to a reduction in Wireless revenues (-11%) but this was offset by strong growth in Photonics (+28%). Additionally the group made strong progress monetising its significant IP portfolio, achieving £8.0m of license income in the year. There are ongoing licensing opportunities with c.£2m already achieved in Q1’16. The group has made a strong start to 2016 and we do not expect to make any material changes to our forecasts. IQE is heading into a particularly exciting period as strong momentum in the compound semiconductor industry and high levels of external investment combine with IQE’s reducing deferred consideration commitments and increasing diversification. Trading on just 6.4x FY’16 PER we believe the shares are highly attractive and retain our 29p target price, offering significant upside from the current level. Buy.
IQE announced at midday yesterday that it had successfully renegotiated its long-term supply contract with its premier Tier 1 customer, for the supply of wafer products used in wireless applications. The group estimates that the contract will contribute more than $55m of revenue during FY’16. The renewal of this contract is not a surprise given IQE’s market share in Wireless and strong customer relationships, but we view the expected size of the contract in FY’16 as a positive, given recent Wireless market commentary. The shares have rallied from their December lows but still sit on an FY’16 PER of just 7.4x. We continue to view this as attractive given the group’s market position, increasing revenue diversification, high margin revenue streams and medium term growth potential. We retain our 29p target price and remain at Buy.
IQE's confirmation that full year results are expected to be in line with expectations, despite broadening weakness in wireless, was encouraging. This reflects both the progress the company is making in diversifying its revenues and its more measured approach to setting expectations. With the company's rating at a substantial discount to its peers, we believe this continued progress should justify an upward re-rating in the shares.
IQE shares have fallen c.25% over the last two months on fears that softer conditions in its core Wireless market will impact on the full year results. With three weeks of the year to go we believe these fears are overdone and leave our forecasts unchanged. As we noted at the interim results in September, the H2 weighting in our forecasts is in-line with a typical outcome for the group. Additionally the £2m IP licence relating to the Cardiff University joint venture gives us confidence that the group can meet our profit forecasts in spite of any weakness in the Wireless market. IQE has consistently shown its ability to manage its cost base and deliver profit growth through the cycle, and has made good progress in growing non-Wireless revenues. The shares are now trading on a Dec’15 PER of just 7.4x falling to 6.6x in Dec’16, which we feel is highly attractive given the group’s market position, high margin revenue streams and medium term growth potential. We retain our 29p target price and Buy recommendation.
Microcap - Uncovered gems - Niche Hotels Further positive snippets on EZH/SSTY/ZZZ | IQE PLC (IQE LN) Further progress expected
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IQE’s licence agreement with Translucent has the potential to accelerate its developments and secure key IP in the high-growth GaN on silicon market. While at the revenue level the company’s transformation to a more diversified compound semiconductor business still has some way to go, its pathway is becoming clearer. With continued execution along this path, we believe the share should rerate upwards from its lowly 9x P/E rating.
IQE’s interim results last week were in-line with expectations and our forecasts are unchanged. These imply a c.55% H2 revenue weighing in the current year, which is in-line with a typical outcome. Whilst we cannot rule out current macro pressures resulting in an inventory correction later in the year, customer forecasts are currently following normal second half patterns and we believe the group are on track to meet full year expectations. We increase our target price to 29p (from 25p) representing 10x FY’16 PER. We see scope to increase this rating as revenue diversification improves and the medium term growth opportunities begin to impact numbers. Buy.
IQE’s interim results were largely flagged at the trading update in July. Revenue grew 2% to £53.2m (H1’14: £52.0m) with adjusted operating profit and fully diluted eps both up 5% at £6.7m and 0.9p respectively. Net debt improved to £31.1m. Customer forecasts are currently following normal second half patterns, leaving the group on course to meet our full year forecasts. Separately the group has announced an exclusive licence and option agreement to acquire Translucent Inc’s Compound Semiconductor on Silicon technology. IQE will pay a maximum of $1.5m for the licence with an option to purchase the technology for $5m within the 30 month licence period. We believe the Compound Semiconductor on Silicon market represents a significant medium term opportunity for IQE and welcome the move to expand its technology in this area.
CLOUDCALL GROUP PLC (CALL LN) | IQE PLC (IQE LN) Solid H1 paves the way for another good year | MIDATECH PHARMA PLC (MTPH LN) A golden opportunity | RENEURON GROUP (RENE LN) Funded to H1 2019 | RESTORE PLC (RST LN) First step in restoring confidence | WILMINGTON PLC (WIL LN) Full year slightly ahead and good outlook for FY16
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IQE’s trading update reported stable revenues with 2% growth y-o-y and strength in Photonics due to numerous end-market drivers. Total revenue growth was slightly held back by temporary production disruption at one of its customers, but this has now been solved and Q3 has had a good start. The stable performance should alleviate fears of a revenue collapse caused by silicon PAs displacing compound semis in the important mobile phone market, which increasingly appear to be unfounded.
IQE has released a trading update for the six months to June 2015. Group revenue grew 2% in the first half, in-line with our expectations. Adjusted operating profit of £6.7m and EPS of 0.9p are also broadly in-line with our forecasts (N+1Se: £7.0m and 0.94p respectively). Net debt was slightly better at £31.1m vs our £32.2m forecast. The expected stabilisation in the wireless market has occurred with strong growth expected in the second half and the photonics business has continued to perform well. H2 is reported to have started well and we leave our full year expectations unchanged.
