Diversification combats wireless volatility

IQE 21 December 2015 Update

IQE

Diversification combats wireless volatility

Trading update

Tech hardware & equipment

21 December 2015

Price

18.00p

Market cap

£120m

Est net debt (£m) at end December 2015

25

Shares in issue

665.4m

Free float

88%

Code

IQE

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(24.2)

(29.4)

0.0

Rel (local)

(22.6)

(28.7)

(1.1)

52-week high/low

26.75p

17.25p

Business description

IQE is the leading supplier of epitaxial compound semiconductor wafers globally. The principal applications include radio frequency semiconductors, vertical cavity lasers, infra-red frequency semiconductors, power electronics and CPV solar cells.

Next events

Full year results

22 March 2016

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

IQE is a research client of Edison Investment Research Limited

IQE's confirmation that full year results are expected to be in line with expectations, despite broadening weakness in wireless, was encouraging. This reflects both the progress the company is making in diversifying its revenues and its more measured approach to setting expectations. With the company's rating at a substantial discount to its peers, we believe this continued progress should justify an upward re-rating in the shares.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/13

126.8

13.0

2.0

0.0

9.0

0.0

12/14

112.0

16.2

2.4

0.0

7.5

0.0

12/15e

117.5

17.1

2.5

0.0

7.2

0.0

12/16e

122.0

19.0

2.8

0.0

6.4

0.0

Note: *PBT and EPS are normalised, excluding acquired intangible amortisation, exceptional items, wafer discount related to the RFMD/Qorvo acquisition, non-cash tax credits and share-based payments.

Growth in wireless sector slowing

Weakness in the handset chip supply chain has broadened into Q4, most recently to include those with substantial exposure to Apple, such as Dialog and Imagination Technologies. However, the size of IQE’s market share (around 55% of the global outsourced wireless epitaxy market) reduces its exposure to any individual phone manufacturer even though customer consolidation makes some ‘lumpiness’ in revenues inevitable. Moreover, while market growth is flattening, we believe that the sector should remain an important cash cow for IQE.

Diversification activity accelerating

The photonics business continues to perform strongly, delivering significant double-digit revenue growth. A mix of applications contributed to this growth, particularly data centre connectivity, optical communications and a broad range of sensor products. The InfraRed and CMOS++ businesses also performed well. The first pilot production revenues were generated from Solar-related activities for ultimate deployment in the Middle East. Significantly, during FY15 IQE formed joint ventures in Singapore and the UK heralding the start of IP licensing. This additional revenue stream is likely to become more significant longer term if IQE’s technology is deployed in volume applications such as general-purpose LED lighting and solar power. We leave our estimates unchanged, noting that weakness in the wireless sector may persist into 2016.

Valuation: Undemanding rating

The reported weakness in the wireless market has weighed down on the share price, which has fallen by 32% since October. IQE’s rating is undemanding and remains at a substantial discount to its peers. If the business progresses to plan, we should see its revenues continue to diversify, cash conversion improve as the RFMD wafer discount tapers off and the balance sheet strengthen as the final tranche of deferred consideration for Kopin is paid. We believe these factors should be a catalyst for an upward re-rating of the shares.

Exhibit 1: Financial summary

£'000s

2013

2014

2015e

2016e

Year End 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

126,774

112,011

117,503

122,043

Cost of Sales (Inc D&A + SBP)

(98,835)

(87,858)

(87,858)

(87,375)

Gross Profit

27,939

24,153

29,646

34,667

EBITDA

 

 

24,920

27,009

28,010

30,654

Depreciation and Amortisation

(10,364)

(9,391)

(9,387)

(9,800)

Operating Profit (before amort. and except.)

 

 

14,556

17,618

18,623

20,854

Acquired Intangible Amortisation

(730)

(1,116)

(1,204)

(1,200)

Exceptionals

(5,673)

(8,372)

4,365

0

Other

(1,415)

(1,458)

(1,996)

(1,996)

Operating Profit

6,738

6,672

19,788

17,658

Net Interest

(1,546)

(1,429)

(1,480)

(1,828)

Profit Before Tax (norm)

 

 

13,010

16,189

17,143

19,026

Profit Before Tax (FRS 3)

 

 

5,192

5,243

18,308

15,830

Tax

934

(3,247)

500

500

Profit After Tax (norm)

13,614

16,701

17,143

19,026

Profit After Tax (FRS 3)

6,126

1,996

18,808

16,330

Average Number of Shares Outstanding (m)

642.2

650.8

660.5

665.4

EPS - normalised fully diluted (p)

 

 

2.00

2.42

2.52

2.77

EPS - (IFRS) (p)

 

 

0.9

0.3

2.8

2.5

Dividend per share (p)

0.0

0.0

0.0

0.0

Gross Margin (%)

22.0

21.6

25.2

28.4

EBITDA Margin (%)

19.7

24.1

23.8

25.1

Operating Margin (before GW and except.) (%)

11.5

15.7

15.8

17.1

BALANCE SHEET

Fixed Assets

 

 

163,739

160,999

162,941

172,155

Intangible Assets

75,859

82,079

81,634

82,934

Tangible Assets

71,840

66,588

68,068

75,982

Investments

16,040

12,332

13,239

13,239

Current Assets

 

 

43,867

48,323

55,728

58,998

Stocks

17,702

18,276

19,500

21,000

Debtors

22,907

24,463

24,800

27,500

Cash

3,258

5,584

11,428

10,498

Other

0

0

0

0

Current Liabilities

 

 

(35,918)

(46,667)

(38,528)

(24,314)

Creditors

(31,114)

(31,947)

(34,932)

(20,718)

Short term borrowings

(4,804)

(14,720)

(3,596)

(3,596)

Long Term Liabilities

 

 

(59,437)

(41,480)

(36,728)

(36,728)

Long term borrowings

(32,805)

(22,115)

(32,875)

(32,875)

Other long term liabilities

(26,632)

(19,365)

(3,853)

(3,853)

Net Assets

 

 

112,251

121,175

143,413

170,112

CASH FLOW

Operating Cash Flow

 

 

12,762

14,861

14,731

19,454

Net Interest

(1,546)

(1,428)

(1,144)

(670)

Tax

(686)

1,258

58

500

Capex

(10,098)

(9,426)

(7,646)

(9,500)

Acquisitions/disposals

(36,533)

0

0

(10,714)

Financing

16,106

278

260

0

Dividends

0

0

0

0

Net Cash Flow

(19,995)

5,543

6,259

(930)

Opening net debt/(cash)

 

 

15,483

34,351

31,251

25,043

HP finance leases initiated

0

0

0

0

Other

1,127

(2,443)

(51)

0

Closing net debt/(cash)

 

 

34,351

31,251

25,043

25,973

Source: Company accounts, Edison Investment Research

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