FY20 revenues ahead of November guidance

IQE 21 January 2021 Update
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IQE

FY20 revenues ahead of November guidance

Post-close trading update

Tech hardware & equipment

21 January 2021

Price

85.0p

Market cap

£680m

Net debt (£m) at end June 2020 (excluding £48.1m finance leases)

7.4

Shares in issue

800.4m

Free float

86.8%

Code

IQE

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

18.9

50.7

68.3

Rel (local)

14.9

30.9

87.3

52-week high/low

85.0p

20.0p

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 surface emitting lasers and infrared semiconductors.

Next events

FY20 results

March 2021

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 it expects FY20 revenues to be c £178m. This is ahead of our estimates, which we revised upwards in November, reflecting outperformance in both the wireless and photonics segments. We have updated our FY20 forecasts. Given IQE’s leveraged business model, this results in a 64% uplift in EPS. Noting the uncertainty about the effect of a pandemic-related recession on the rate of smartphone sales growth, we leave our FY21 estimates unchanged for the time being.

Year end

Revenue (£m)

EBIT*
(£m)

PBT*
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

12/18

156.3

16.0

14.0

1.38

0.0

61.6

12/19

140.0

(4.7)

(7.0)

(2.46)

0.0

N/A

12/20e

178.3

8.5

6.6

0.63

0.0

N/A

12/21e

183.3

13.1

12.0

1.16

0.0

73.3

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

Wireless boosted by 5G roll-out

Demand for IQE’s epitaxy in smartphones remained strong throughout Q420 with positive momentum continuing in Q121. The outlook for the year appears favourable, although the outcome will depend on the severity of any coronavirus-related recession and what consumers choose to do with their reduced disposable income. In late November 2020, International Data Corporation forecast that smartphone shipments would grow by 4.4% year-on-year during 2021 after a dip in FY20, supported by significant incentives from both equipment manufacturers and network operators for new 5G products.

Photonics benefitting from LiDAR

Production for IQE’s major vertical cavity surface emitting laser (VCSEL) customer, which we have previously inferred is involved in the Apple supply chain, was also strong throughout Q420. Demand is benefitting from the launch of the iPhone 12 Pro, which includes a world-facing LiDAR scanner to improve augmented reality (AR) experiences. The ability to integrate more accurate information about a handset user’s physical environment in the AR world will potentially catalyse the launch of ‘must-have’ AR apps. This appears beneficial for iPhone 12 Pro sales with AppleInsider predicting the number of iPhone 12 units being manufactured during Q121 will be 38% higher than builds a year previously. ’Must-have’ AR apps would also encourage Android handset manufacturers, several of which already use modest amounts of IQE’s VCSEL epitaxy, to add LiDAR to their devices.

Valuation: Dependent on handset market growth

At current levels IQE is trading at a modest discount to the mean EV/EBITDA multiples of the sample of companies engaged in manufacturing VCSEL epitaxy. Given IQE’s broader product portfolio, we believe it is reasonable for IQE to trade on multiples that are at the upper bound of this sample. However, we believe share price improvement will require greater visibility of how handset demand will be affected by any pandemic related recession in 2021 and whether the switch to 5G and the availability of as yet unknown ‘must-have’ AR apps will be sufficient motivation for cash-constrained consumers to justify upgrading their handsets.

Revisions to estimates

Exhibit 1: Estimate changes

FY19

FY20e

FY21e

Actual

Old

New

% change

Old

New

% change

Revenue (£m)

140.0

170.6

178.3

4.5

183.3

183.3

0.0

Adjusted PBT (£m)

(7.0)

4.2

6.6

57.7

12.0

12.0

0.0

Adjusted EPS (p)

(2.5)

0.4

0.6

64.2

1.2

1.2

0.0

Capitalised R&D (£m)

10.0

6.0

6.0

0.0

6.0

6.0

0.0

PPE (£m)

31.9

7.0

7.0

0.0

10.0

10.0

0.0

Net (cash)/debt excluding finance leases at year end (£m)

16.0

4.2

(1.9)

N/A

(7.2)

(10.8)

50.7

Source: IQE, Edison Investment Research

We revise our estimates to reflect the following:

More precise FY20 revenue guidance with outperformance in both the wireless and photonics segments. We are not changing our FY21 estimates.

Focus on cash management giving lower working capital requirements at end FY20. Management notes this resulted in a net cash position of c £2m at the end of FY20.

Valuation: Further share price appreciation dependent on pace of global handset market growth

We include a comparative valuation of IQE versus its broader (but imperfect) peer group below. At current levels, IQE is trading in line on an EV/EBITDA basis with regards to the mean of the larger sample and at a modest discount to the mean of the sample of companies engaged in manufacturing VCSEL epitaxy. It is trading above the upper bound of the sample of VCSEL peers with regards to P/E multiples.

Exhibit 2: Peer valuation

Name

Market Cap m ($)

EV/ Sales 1FY (x)

EV/ Sales 2FY (x)

EV/ EBITDA 1FY (x)

EV/ EBITDA 2FY (x)

P/E 1FY (x)

P/E 2FY (x)

Epitaxy

GCS Holdings

174

2.5

2.5

-!

-

(295.6)

(28.1)

IntelliEPI

70

2.7

2.3

19.9

14.1

132.0

31.8

LandMark Optoelectronics

1,012

11.9

9.1

23.5

17.5

50.8

32.2

Soitec

6,853

9.3

7.1

31.8

23.3

65.5

41.5

Visual Photonics Epitaxy

734

7.9

6.7

21.5

18.0

39.0

29.2

WIN Semiconductors

6,434

7.2

6.5

15.7

14.6

26.6

25.6

Opto-electronics

II-VI

9,156

3.4

3.2

13.8

12.3

25.8

22.9

EMCORE

147

0.9

0.8

9.5

6.6

16.9

11.5

Lumentum Holdings

8,023

4.2

3.8

11.9

10.9

17.2

15.5

Mean - Epitaxy and Opto-electronics

5.6

4.7

18.4

14.7

46.7

26.3

IntelliEPI

70

2.7

2.3

19.9

14.1

132.0

31.8

LandMark Optoelectronics

1,012

11.9

9.1

23.5

17.5

50.8

32.2

Visual Photonics Epitaxy

734

7.9

6.7

21.5

18.0

39.0

29.2

Mean - VCSELs

7.5

6.0

21.6

16.5

73.9

31.1

IQE Plc

$224m

3.4

3.3

18.6

15.9

119.8

65.4

Source: Refinitiv, Edison Investment Research. Note: Prices at 18 January 2021. Grey shading indicates exclusion from mean.

IQE has a broader product portfolio than its VCSEL peers. In addition, it can manufacture on multiple sites, which gives it relative resilience to US-China trade disputes. For these reasons, we believe it is reasonable for IQE to trade on EV/EBITDA and P/E multiples that are at the upper end of the VCSEL sample. However, we believe further share price improvement will require greater visibility of how handset demand will be affected by any potential pandemic-related recession in FY21 and whether the switch to 5G and the availability of as yet unknown ‘must-have’ AR apps will be sufficient motivation for cash-constrained consumers to justify upgrading their handsets.

Exhibit 3: Financial summary

£'000s

2018

2019

2020e

2021e

Year End 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

restated

Revenue

 

 

156,291

140,015

178,349

183,307

Adjusted Cost of Sales

(119,536)

(119,145)

(137,697)

(138,427)

Adjusted Gross Profit

36,755

20,870

40,652

44,880

EBITDA

 

 

26,404

16,246

33,312

38,809

Depreciation and Amortisation

(12,882)

(22,289)

(25,068)

(26,018)

Operating Profit (before amort. and except.)

 

 

16,040

(4,676)

8,544

13,091

Acquired Intangible Amortisation

0

0

0

0

Exceptionals

(8,424)

(14,897)

(9,346)

0

Share based payments

1,044

771

(550)

(550)

Operating Profit

8,660

(18,802)

(1,352)

12,541

Underlying interest

(66)

(1,606)

(1,600)

(800)

Exceptionals and losses from JVs

(1,847)

(4,540)

(300)

(300)

Profit Before Tax (norm)

 

 

13,974

(7,019)

6,644

11,991

Profit Before Tax (FRS 3)

 

 

6,747

(24,948)

(3,252)

11,441

Reported tax

(5,558)

(10,180)

1,826

(2,278)

Profit After Tax (norm)

11,229

(19,010)

5,381

9,713

Profit After Tax (FRS 3)

1,189

(35,128)

(1,426)

9,163

Average Number of Shares Outstanding (m)

761.8

787.2

797.2

800.4

EPS - normalised (p)

 

 

1.38

(2.46)

0.63

1.16

EPS - (IFRS) (p)

 

 

0.13

(4.51)

(0.22)

1.10

Dividend per share (p)

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

267,476

300,047

287,979

277,961

Intangible Assets

121,775

118,456

116,048

113,040

Tangible Assets

124,520

136,557

126,897

119,887

Other

21,181

45,034

45,034

45,034

Current Assets

 

 

94,531

72,533

99,448

120,440

Stocks

35,709

30,668

34,204

40,177

Debtors

38,015

33,065

38,601

44,697

Cash

20,807

8,800

26,642

35,566

Other

0

0

0

0

Current Liabilities

 

 

(48,893)

(32,646)

(41,949)

(40,932)

Creditors

(48,893)

(27,529)

(36,832)

(35,815)

Short term borrowings*

0

(5,117)

(5,117)

(5,117)

Long Term Liabilities

 

 

(3,836)

(69,491)

(69,491)

(69,491)

Long term borrowings*

0

(67,631)

(67,631)

(67,631)

Other long-term liabilities

(3,836)

(1,860)

(1,860)

(1,860)

Net Assets

 

 

309,278

270,443

275,987

287,978

CASH FLOW

Operating Cash Flow

 

 

16,988

8,948

32,442

25,724

Net Interest

(66)

(671)

(1,600)

(800)

Tax

(665)

(151)

0

0

Capital expenditure and capitalised R&D

(42,362)

(41,834)

(13,000)

(16,000)

Acquisitions/disposals

0

10

0

0

Financing

813

712

0

0

Dividends

0

0

0

0

Net Cash Flow

(25,292)

(32,986)

17,842

8,924

Opening net debt/(cash)*

 

 

(45,612)

(20,807)

63,948

46,106

HP finance leases initiated

0

0

0

0

Other

487

(51,769)

0

0

Closing net debt/(cash)*

 

 

(20,807)

63,948

46,106

37,182

Closing net debt/(cash) excluding finance leases

 

 

15,970

(1,872)

(10,796)

Source: Company data, Edison Investment Research. Note: *Including finance leases from FY19 onwards.


General disclaimer and copyright

This report has been commissioned by IQE and prepared and issued by Edison, in consideration of a fee payable by IQE. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for ‘wholesale clients’ within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the ‘FPO’) (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by IQE and prepared and issued by Edison, in consideration of a fee payable by IQE. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for ‘wholesale clients’ within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the ‘FPO’) (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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