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.
Total revenues rose by 16% to £154.5m y-o-y, slightly ahead of our £150.1m estimate. The 21% rise in wafer sales was predominantly driven by volume rampup during H217 of VCSEL programmes which we infer relate to the iPhone X. Photonics revenues doubled while wireless revenues were flat. As we expected, licence fees were significantly lower than in FY16 (£1.9m vs.£6.7m) as the prior year benefited from one-off payments received during the initial phases of the JVs. Adjusted PBT rose by 18% to £24.3m, also slightly ahead of our £23.7m estimate. The group moved from £39.5m net debt at end FY16 to £45.6m net cash at end FY17 following a Placing at 140p/share raising £95m (gross) to finance additional capacity and development work to support expected demand in photonics.
Management estimates that existing volume programmes will deliver 35-60% growth in photonics revenues during FY18. We take a relatively cautious approach, modelling a 40% y-o-y increase in both FY18 and FY19 (FY19 estimates are presented for the first time), but even this necessitates an upwards revision to our FY18 estimates. Management estimates that programmes under development are likely to deliver 40-60% CAGR for photonics revenues over the next three to five years. These include VCSELs for consumer applications such as hand and body tracking, collision avoidance systems, data communications and industrial applications such as heating, indium phosphide wafers for high speed data networks and infrared sensitive wafers for healthcare applications.
Our analysis of prospective P/E multiples for listed peers indicates that the current price assumes that IQE will perform at the top end of management guidance during FY18 and FY19. It indicates potential for share price appreciation if some of the other programmes under development move into volume production in the next 12- 18 months, making management’s guidance appear too conservative.