IQE expects H118 revenues to be c £73m compared with £70m H117, as doubledigit sales growth on a constant currency basis in each of the three primary markets was offset by a 9.5% currency headwind. The segmental split was distorted by inventory management factors. During both H117 and H217, significant production capacity was allocated to the VSCEL ramp-up for a 3D sensing application. During H118, sales to the chip manufacturer servicing this application were similar to H117, as the supply chain absorbed inventory, enabling the group to replenish wireless inventory channels and start work on a significant number of VCSEL production qualifications. On a constant currency basis, wireless revenues grew by almost 11% year-on-year, photonics by 30% and infra-red by c 11%.

The recent work on VCSEL product qualifications has resulted in IQE being in mass production with six VCSEL chip manufacturers and in final qualification stages with another six, with volumes already ramping up in H218. These are for mobile, sensing, automotive and datacom applications. We leave our estimates broadly unchanged, raising our FY18 revenue estimate from £174.9m to £178.1m and our FY19 revenue estimate from £203.8m to £207.1m. 

The share price has declined from the peak of 178.75p in November 2017. A comparison of IQE’s FY18 P/E multiple against those of listed peers shows it trading at a premium (29.0x vs 23.2x). However, if we restrict the comparison to the three listed companies offering epitaxy for VCSELs (IntelliEPI, LandMark Optoelectronics and Visual Photonics), then IQE is trading close to the mean (27.8x vs 26.8x) and below Landmark (28.2x) and Visual Photonics (33.3x) despite being in a stronger market position than both. Taking this approach, the shares look fairly priced at current levels despite modelling fairly unambitious photonics revenue growth (40%) in our estimates.