IQE’s diversification strategy delivered a 17% jump in adjusted profit before tax during FY16. Strong growth in photonics revenues was a key element of this improvement. This was boosted by a return to growth, albeit modest, in the wireless sector and weak sterling. We revise our FY17 estimates upwards to reflect the progress made on customer qualifications for photonics applications, and we introduce FY18 estimates.
Group revenues grew by 16% y-o-y, to £132.7m, in line with our £129.0m estimate. Trading was strong in multiple markets throughout FY16, with wireless revenues returning to growth (15%) and photonics recording a 43% increase. The two key applications – vertical cavity surface emitting lasers (VCSELs), which are used in data communications, consumer and industrial applications; and indium phosphide (InP), which is used in fibre to the premises and other short-haul optical networks – are experiencing strong demand. Revenues also benefited from weakness in sterling throughout the year. Adjusted profit before tax rose by 17% to £20.6m, in line with our £20.3m estimate.
Growth in photonics revenues is expected to continue. In February, industry commentator MarketsandMarkets.com noted that the global VCSEL market was worth $955m in 2015 and forecast a 17.3% CAGR between 2016 and 2022. For IQE, confidence in continued growth in photonics revenues is underpinned by the progress made on customer qualifications for photonics applications during FY16. We raise our FY17 estimates to reflect some photonics development projects converting to commercial programmes, noting potential for further upgrades depending on how quickly customers ramp up production volumes.
IQE’s share price has risen by over 40% since our update note in December. Our analysis, which is based on peer group multiples, indicates that the shares are fairly priced at current levels. However, we note the potential for further price movement upwards if greater clarity regarding the rate of volume ramp up of photonics programmes results in estimate upgrades.