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.
The interconnected nature of semiconductor supply chains means it has taken time for IQE’s customers to feel the full impact of the US Department of Commerce’s decision in May to add Huawei to the Entity List. As noted in the November trading update, two of its major US wireless customers have been particularly badly affected by the ban. IQE’s production footprint with facilities in the US, the UK and Asia mitigates the impact of these supply chain shifts. It is already qualifying production tools for wireless applications with a major Taiwanese foundry and is engaged with multiple Asian photonics manufacturers. Although it will take time for IQE to win business to completely offset the reduced demand from its US customers, the result will be a more diversified customer base.
Investor attention tends to focus on the health of the major VCSEL programme where volumes have been consistently strong in recent months. Two recently announced vertical cavity surface emitting laser (VCSEL) production qualifications for Android-related supply chains reduce IQE’s exposure to this programme. Moreover VCSELs, which are used in other applications in addition to 3D-sensing, account for only half of IQE’s photonics related revenues, which form around half of the group total. The other half are derived from wireless applications, around twothirds of which are hand-set related, the remainder infrastructure.
The share price has fallen by c 33% since 1 November. Based on our estimates, which were revised following the November trading update, IQE is now trading at a discount to the average of its peers on a prospective EV/sales basis (2.7x vs 4.7x). This indicates potential for share price recovery once investor confidence returns. Key indicators will be further Asian contract wins in both wireless and photonics and additional VCSEL programmes progressing to volume production.