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%.
Total FY18 revenues grew by 1% year-on-year to £156.3m, in line with our estimate. Wireless revenues rose by 7% to 63% of the total as inventory channels were replenished and customers made last-time buys ahead of the closure of the New Jersey facility. Photonics revenues dipped by 8% to 28% of the total because of inventory overhang in H118, followed by supply chain disruption caused by OEM product sales softness in Q418. Adjusted profit before tax was depressed by several factors, almost halving to £14.0m (also in line with our expectations). These include currency headwind, production inefficiencies arising from lower VCSEL volumes, the cost of multiple low-margin VCSEL qualification programmes, the cost of staffing the new Newport facility prior to commencing production and a higher proportion of wireless products. Net cash fell by £24.8m to £20.8m at the year-end, reflecting continued investment (£12.0m) in multiple innovative technologies and £30.4m in property, plant and equipment, primarily for the new Newport foundry.
We adjust our FY19 estimates downwards in line with management guidance, which notes softness in the global handset market and adopts a more prudent stance regarding the ramp-up rate of new VCSEL programmes. Volume production on some of these, including shipments to companies in the Android supply chain, has already started. Further VCSEL ramp-ups, combined with a return to growth in the wireless segment, underpin FY20 growth with upside from 5G investment.
Using our revised estimates and management medium-term guidance as the basis for a DCF analysis gives an indicative valuation range of 91–99p/share. The share price has dropped by more than 10% since the results. We see potential for share price recovery on positive newsflow regarding both the initial volume VCSEL programme and newer ones that are commencing production.