Funds raised to support VCSEL ramp-up

IQE 14 November 2017 Update
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IQE

Funds raised to support VCSEL ramp-up

Placing

Tech hardware & equipment

14 November 2017

Price

170p

Market cap

£1168m

Net debt* (£m) at end June 2017
*Prior to placing raising up to £95.1m gross

41.9

Shares in issue*
*Prior to Placing

686.8m

Free float

88.5%

Code

IQE

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

26.9

30.5

471.4

Rel (local)

29.0

28.7

414.7

52-week high/low

170.0p

29.5p

Business description

IQE is the leading supplier of epitaxial compound semiconductor wafers globally. The principal applications include radio frequency semiconductors, devices for optical networks, vertical cavity lasers, infrared semiconductors, power electronics and CPV solar cells.

Next events

Prelims

March 2018

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 has announced its intention to raise up to £95.1m (gross) through a placing of up to 67.9m new shares at 140p/share. The funds will enable IQE to expand capacity to support multiple VCSEL volume ramp-ups from FY19 onwards. We expect the share issue to be earnings neutral in the near term, and are encouraged by this signal of confidence from management as it prepares for the next step change in output.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/15

114.0

17.6

2.60

0.0

65.4

N/A

12/16

132.7

20.6

3.00

0.0

56.7

N/A

12/17e

145.3

23.7

3.26

0.0

52.1

N/A

12/18e

160.3

28.3

3.57

0.0

47.6

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Getting ready for multiple VCSEL ramp-ups

The funds raised will be used to purchase an additional 40-60 new MOCVD reactors over the next three to five years (IQE currently has around one hundred, but these are used for a different mix of epitaxies). The reactors will be used to make epitaxy for multiple VCSEL programmes as they move into volume production. Towards the end of H117 IQE began to deliver volume VCSEL epitaxy, which we infer was for the new iPhone X. It is currently working on a range of programmes that have potential to become volume contracts in future. Some are for other phone manufacturers wanting to emulate the capabilities of the new iPhone. Some are for other consumer applications including hand and body tracking, automotive applications, data comms and industrial applications such as heating, InP (indium phosphide) wafers for high-speed data networks and GaN (gallium nitride) wafers for radio frequency and power applications.

Share issue earnings neutral

We have updated our estimates to reflect the proposed placing. Since there is a 12-month lead time for MOCVD reactors, the first units funded by the placing will not be delivered and start producing epitaxy until FY19, so there is no change to our near-term revenue and earnings estimates. The near-term dilutive impact of the new shares, which represent up to 9.9% of the existing shares in issue, is offset by a reduction in finance charges; there should be a positive impact on EPS from FY19 onwards as new capacity comes online. We have raised our capex estimates, which include capitalised R&D and equipment, for both FY17 and FY18.

Valuation: Earnings upgrades priced in

The shares have performed extremely well in recent months, rising more than 4x from 29.5p a year ago, and are now trading on multiples that suggest that upgrades in earnings are already priced in. While noting that there remains uncertainty regarding Q417 deliveries, management recognises potential for FY17 earnings to exceed current expectations. Our September outlook note explores the impact of potentially faster rates of VCSEL roll-out on FY17 and FY18 EPS.

Exhibit 1: Financial summary

£'000s

2015

2016

2017e

2018e

Year End 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

114,024

132,707

145,346

160,303

Cost of Sales (Inc D&A + SBP)

(81,585)

(96,292)

(105,303)

(115,664)

Gross Profit

32,439

36,415

40,043

44,639

EBITDA

 

29,001

31,730

35,462

40,287

Depreciation and Amortisation

(10,024)

(9,611)

(10,000)

(12,300)

Operating Profit (before amort. and except.)

18,977

22,119

25,462

27,987

Acquired Intangible Amortisation

(1,208)

(1,327)

(1,327)

(1,327)

Exceptionals

5,398

1,915

0

0

Share based payments

(2,001)

(2,042)

(3,000)

(3,000)

Operating Profit

21,166

20,665

21,135

23,660

Underlying interest

(1,403)

(1,489)

(1,725)

300

Exceptionals

(387)

(144)

0

0

Profit Before Tax (norm)

 

17,574

20,630

23,737

28,287

Profit Before Tax (FRS 3)

 

19,376

19,032

19,410

23,960

Tax

773

408

500

500

Profit After Tax (norm)

18,066

21,440

23,737

28,287

Profit After Tax (FRS 3)

20,149

19,440

19,910

24,460

Average Number of Shares Outstanding (m)

662.6

671.5

689.8

754.8

EPS - normalised (p)

 

2.60

3.00

3.26

3.57

EPS - (IFRS) (p)

 

3.00

2.87

2.89

3.24

Dividend per share (p)

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

174,207

215,154

238,827

260,200

Intangible Assets

86,843

103,972

113,645

116,518

Tangible Assets

65,154

85,001

99,001

117,501

Other

22,210

26,181

26,181

26,181

Current Assets

 

48,909

64,323

113,275

119,748

Stocks

21,215

28,498

34,214

38,755

Debtors

23,050

30,868

34,278

39,163

Cash

4,644

4,957

44,784

41,830

Current Liabilities

 

(48,050)

(46,012)

(40,921)

(42,645)

Creditors

(44,809)

(38,360)

(40,921)

(42,645)

Short term borrowings

(3,241)

(7,652)

0

0

Long Term Liabilities

 

(28,032)

(39,021)

(2,167)

(2,167)

Long term borrowings

(24,626)

(36,854)

0

0

Other long term liabilities

(3,406)

(2,167)

(2,167)

(2,167)

Net Assets

 

147,034

194,444

309,015

335,136

CASH FLOW

Operating Cash Flow

 

20,971

22,463

28,897

32,585

Net Interest

(1,403)

(1,489)

(1,725)

300

Tax

(459)

(839)

(839)

(839)

Capex

(10,002)

(19,060)

(35,000)

(35,000)

Acquisitions/disposals

0

(11,250)

0

0

Financing

544

578

93,000

0

Dividends

0

0

0

0

Net Cash Flow

9,651

(9,597)

84,333

(2,954)

Opening net debt/(cash)

 

31,251

23,223

39,549

(44,784)

HP finance leases initiated

0

0

0

0

Other

(1,623)

(6,729)

0

0

Closing net debt/(cash)

 

23,223

39,549

(44,784)

(41,830)

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by IQE and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Schumannstrasse 34b

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Germany

London +44 (0)20 3077 5700

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United Kingdom

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US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by IQE and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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