Optimising its MBE footprint

IQE 1 October 2021 Update
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IQE

Optimising its MBE footprint

Singapore site closure

Tech hardware & equipment

1 October 2021

Price

47.55p

Market cap

£381m

Net cash (£m) at end June 2021 (excluding £52.6m lease liabilities)

0.9

Shares in issue

802.2m

Free float

88.1%

Code

IQE

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(9.5)

(0.4)

(7.0)

Rel (local)

(8.3)

(1.5)

(24.8)

52-week high/low

88.3p

43.3p

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 event

FY21 results

March 2022

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 that it will be closing its Singapore site by mid-2022 and transferring activity to its sites in North Carolina and Taiwan. The move will generate estimated annualised cash cost savings of c £4.8m so we have revised our FY22 estimates, raising adjusted EPS by 8%. Importantly it helps create an optimised platform for pursuing volume opportunities for MBE epitaxy used for long-wavelength VCSELs and healthcare applications.

Year end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

12/19

140.0

16.2

(7.0)

(2.46)

0.00

N/A

12/20

178.0

29.9

3.2

0.29

0.00

164.0

12/21e

169.5

27.4

0.1

(0.04)

0.00

N/A

12/22e

182.4

39.5

7.3

0.68

0.00

69.9

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

Creating an MBE centre of excellence

IQE’s Singapore operation manufactures epiwafers for photo detectors and radio frequency applications using molecular beam epitaxy (MBE) systems but is relatively underutilised. Following the site closure, most of its MBE reactors will be moved to IQE’s North Carolina site, and the remainder to its facility in Taiwan. By 2024 all of the MBE reactors at IQE’s Pennsylvania site will be moved to the North Carolina facility as well, creating an operation with the scale to take advantage of the opportunities for using MBE to make long-wavelength vertical cavity surface emitting lasers (VCSELs) that can be used below OLED screens in mobile devices, thus dispensing with the ‘notch’, and in eye-safe vehicle LiDAR as well as sensors for healthcare applications (see our thematic piece on laser diodes for details.)

Annualised cash cost-savings of c £4.8m

Management estimates that revenues will drop by £3m during FY22 because of the transition but the closure will save annualised cash costs of around £4.8m. Part of these costs are rent payments. Since the value of the lease had already been impaired under IFRS 16 rules, none of these rent payments currently go through the P&L. Combining this effect with the loss of revenues means that the annualised profit increase will be c £1m. Management expects that the cash costs associated with the closure will be c £2.5m, which we treat as an exceptional item.

Valuation: Recovery dependent on 5G roll-out

IQE’s share price has fallen by over 30% since the FY20 results in March. At current levels, IQE is trading at a discount to the mean EV/EBITDA multiples of the sample of companies engaged in manufacturing VCSEL epitaxy, giving potential for share price improvement. We believe that investors will welcome the profitability enhancement arising from the Singapore site closure. However, in our view share price recovery will require greater visibility of the timing of 5G infrastructure roll-out and of how well the recently launched iPhone 13 models with world-facing time of flight (ToF) functionality sell.

Changes to estimates

We adjust our FY22 estimates in line with the announcement, reducing both revenues and operating costs. The cost savings are applied for half a year as these commence after the site is closed. The impact of these changes is summarised below.

Exhibit 1: Revisions to estimates

FY20

FY21e

FY22e

Actual

Old

New

% change

Old

New

% change

Revenue (£m)

178.0

169.5

169.5

0.0%

185.4

182.4

-1.6%

Adjusted PBT (£m)

3.2

0.1

0.1

0.0%

6.8

7.3

7.4%

Adjusted EPS (p)

0.3

(0.0)

(0.0)

0.0%

0.6

0.7

7.9%

Capitalised R&D (£m)

5.4

8.0

8.0

0.0%

6.0

6.0

0.0%

Property, plant and equipment (£m)

5.0

25.0

25.0

0.0%

10.0

10.0

0.0%

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

(1.9)

11.5

11.5

0.0%

(3.9)

(3.7)

-3.7%

Source: IQE accounts, Edison Investment Research

Valuation: Share price recovery dependent on the pace of 5G infrastructure deployment

We include a comparative valuation of IQE versus its broader (but imperfect) peer group below. At current levels, IQE is trading at a discount to the average of the larger sample for year one and year two EV/sales and year two EV/EBITDA and at a discount to the average of the sample of companies engaged in manufacturing VCSEL epitaxy for EV/sales and EV/EBITDA in both year one and year two. The shares are trading above the upper bound of both samples with regards to P/E multiples. 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 share price recovery will require greater visibility of the timing of 5G infrastructure roll-out, which will determine when GaN-on-SiC epitaxy sales start to pick up. It will also depend on sales of iPhone 13 phones with world-facing ToF functionality and when Android phones start adopting the technology, as these factors could potentially boost demand for VCSEL epitaxy.

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

LandMark Optoelectronics

738

8.1

6.4

15.2

11.9

32.0

23.2

Soitec

7,241

7.6

6.1

24.3

19.0

46.2

35.9

Visual Photonics Epitaxy Co

783

5.8

5.0

14.8

13.1

23.8

19.9

WIN Semiconductors

4,718

5.4

4.6

12.9

10.4

25.0

18.8

Opto-electronics

II-VI

6,293

2.2

1.9

8.4

7.5

16.1

13.3

EMCORE

277

1.3

1.2

7.2

6.0

10.9

9.6

Lumentum Holdings

6,105

3.1

2.8

9.1

8.5

14.4

12.6

Mean – Epitaxy and Opto-electronics

4.8

4.0

13.1

10.9

24.1

19.0

LandMark Optoelectronics

738

8.1

6.4

15.2

11.9

32.0

23.2

Visual Photonics Epitaxy Co

783

5.8

5.0

14.8

13.1

23.8

19.9

Mean – VCSELs

7.0

5.7

15.0

12.5

27.9

21.5

IQE

$515m

2.2

2.1

13.9

9.6

N/A

69.9

Source: Refinitiv, Edison Investment Research. Note: Prices at 30 September 2021.

Exhibit 3: Financial summary

£'000s

2019

2020

2021e

2022e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

140,015

178,016

169,475

182,444

Adjusted Cost of Sales

(119,145)

(144,689)

(140,444)

(146,727)

Adjusted Gross Profit

20,870

33,327

29,031

35,717

EBITDA

 

 

16,246

29,919

27,374

39,455

Depreciation and Amortisation

(22,289)

(24,533)

(25,500)

(30,000)

Operating Profit (before amort. and except.)

 

 

(4,676)

5,386

1,874

9,455

Acquired Intangible Amortisation

0

0

0

0

Exceptionals

(14,897)

(10,638)

0

(2,500)

Share based payments

771

(265)

(1,500)

(1,500)

Operating Profit

(18,802)

(5,517)

374

5,455

Underlying interest

(1,606)

(2,165)

(1,800)

(2,200)

Exceptionals and losses from JVs

(4,540)

3,788

0

0

Profit Before Tax (norm)

 

 

(7,019)

3,221

74

7,255

Profit Before Tax (FRS 3)

 

 

(24,948)

(3,894)

(1,426)

3,255

Reported tax

(10,180)

1,001

(14)

(1,378)

Profit After Tax (norm)

(19,010)

2,702

60

5,876

Profit After Tax (FRS 3)

(35,128)

(2,893)

(1,440)

1,876

Average Number of Shares Outstanding (m)

787.2

797.2

801.6

802.2

EPS - normalised (p)

 

 

(2.46)

0.29

(0.04)

0.68

EPS - (IFRS) (p)

 

 

(4.51)

(0.41)

(0.22)

0.19

Dividend per share (p)

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

300,047

277,161

284,661

270,661

Intangible Assets

118,456

105,772

106,272

104,772

Tangible Assets

136,557

126,229

133,229

120,729

Other

45,034

45,160

45,160

45,160

Current Assets

 

 

72,533

94,125

78,995

101,437

Stocks

30,668

30,887

30,645

34,989

Debtors

33,065

38,575

37,145

39,988

Cash

8,800

24,663

11,205

26,460

Other

0

0

0

0

Current Liabilities

 

 

(32,646)

(48,545)

(44,016)

(46,503)

Creditors

(27,529)

(37,546)

(33,017)

(35,504)

Short term borrowings (including lease liabilities)

(5,117)

(10,999)

(10,999)

(10,999)

Long Term Liabilities

 

 

(69,491)

(62,306)

(57,306)

(57,306)

Long term borrowings (including lease liabilities)

(67,631)

(58,765)

(53,765)

(53,765)

Other long term liabilities

(1,860)

(3,541)

(3,541)

(3,541)

Net Assets

 

 

270,443

260,435

262,334

268,288

CASH FLOW

Operating Cash Flow

 

 

8,948

35,457

26,342

33,455

Net Interest

(671)

(1,142)

(1,800)

(2,200)

Tax

(151)

(993)

0

0

Capital expenditure and capitalised R&D

(41,834)

(10,402)

(33,000)

(16,000)

Acquisitions/disposals

10

(1,363)

0

0

Financing

712

240

0

0

Dividends

0

0

0

0

Net Cash Flow

(32,986)

21,797

(8,458)

15,255

Opening net debt/(cash) including lease liabilities

 

 

(20,807)

63,948

45,101

53,559

HP finance leases initiated

0

0

0

0

Other

(51,769)

(2,950)

0

0

Closing net debt/(cash) including lease liabilities

 

 

63,948

45,101

53,559

38,304

Closing net debt/(cash) excluding finance leases

 

15,970

(1,923)

11,535

(3,720)

Source: Company accounts, Edison Investment Research


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.

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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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