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.
As noted in March, group revenues decreased by 10% year-on-year during FY19 to £140.0m. Wireless revenues decreased by 23% because of destocking related to the US-China trade war. Photonics revenues increased by 4% supported by strong growth in revenues from the major VCSEL customer. Since the business is highly operationally geared, the revenue drop caused the group to move from £16.0m adjusted operating profit in FY18 to a £4.7m adjusted operating loss in FY19.
IQE’s production facilities in the UK, the US, Taiwan and Singapore remain operational. The company is regarded as a critical supplier in the US and there has not been any significant issues with supplies of materials. While economists predict that the COVID-19 pandemic is likely to cause a global recession, we understand that this has not had an impact on demand for IQE’s epitaxy so far. However, the company continues not to provide specific guidance. Our estimates, which we revised downwards in March, assume that IQE’s wireless revenues will not reduce by as much as the global handset market in FY20 because new business for a major Taiwanese foundry will help IQE increase its market share. In addition, we expect that the commencement of volume deliveries of VCSEL epitaxy for multiple Android related supply chains will support growth in photonics revenues in FY20.
Although the share price has recovered from the 20p low immediately prior to the March trading update, it is still trading at a substantial discount on a prospective EV/sales basis to the sample of companies engaged in manufacturing VCSEL epitaxy (year 1 2.2x vs 5.3x). We see potential for further share price recovery once the route to sustainable profitability is clearer.