Outperformance in both wireless and photonics

IQE 25 November 2020 Update
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IQE

Outperformance in both wireless and photonics

Trading update

Tech hardware & equipment

25 November 2020

Price

63.0p

Market cap

£504m

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

7.4

Shares in issue

800.1m

Free float

86.6%

Code

IQE

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

15.2

9.1

46.9

Rel (local)

4.9

2.2

63.6

52-week high/low

64.5p

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 lasers, infrared semiconductors and power electronics.

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 that the strong performance in H120, which resulted in record first-half revenue, has continued into the second half. It has updated FY20 revenue guidance from at least £165m to over £170m, with adjusted EBIT guidance remaining at the mid-single-digit million level. We have updated our FY20 and FY21 forecasts accordingly, giving adjusted PBT upgrades of 34% and 10% for FY20 and FY21 respectively.

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

45.7

12/19

140.0

(4.7)

(7.0)

(2.46)

0.0

N/A

12/20e

170.6

6.1

4.2

0.38

0.0

163.7

12/21e

183.3

13.1

12.0

1.16

0.0

54.4

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

Wireless boosted by 5G roll out

In September we noted that IQE’s longstanding wireless customers had benefited from major design wins and investment in 5G infrastructure and handsets. This trend has continued. Earlier this month, Skyworks stated that it expected double-digit sequential revenue and earnings growth in the December quarter, driven by content gains and product ramps across multiple 5G-enabled smartphone platforms. Qorvo reported expanded module shipments across multiple tier-one smartphone OEMs and projected the robust end-market demand would continue into the December quarter.

Photonics benefiting 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, has been consistently strong throughout the year so far. Demand is benefiting 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 into the AR world will potentially catalyse the launch of ‘must-have’ AR apps. This would be beneficial for iPhone 12 Pro sales. It 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: Recovered ground lost in March

IQE’s share price has more than recovered the ground lost during the panic selling 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. 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-strapped 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)

140.02

165.55

170.62

3.1

178.16

183.31

2.9

Adjusted PBT (£m)

(7.02)

3.15

4.21

33.9

10.89

11.99

10.2

Adjusted EPS (p)

(2.46)

0.28

0.38

39.1

1.05

1.16

10.2

Capitalised R&D (£m)

9.97

6.00

6.00

0.0

6.00

6.00

0.0

Property, plant and equipment (£m)

31.86

10.00

7.00

-30.0

10.00

10.00

0.0

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

15.97

10.32

4.22

-59.1

(2.55)

(7.17)

180.6

Source: Edison Investment Research

We revise our estimates to reflect the following:

Upgraded FY20 revenue guidance with outperformance in both the wireless and photonics segments. We assume the higher than previously expected growth in H220 continues into FY21 and raise our revenue estimates for FY21 as well.

Lower levels of investment in capital equipment during FY20.

Valuation: Share price above pre-pandemic levels

We include a comparative valuation of IQE versus its broader (if imperfect) peer group below. Unlike some of its peers, IQE’s share price has more than recovered the ground lost during the panic selling in March. 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 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

YTD performance (%)

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 Inc

(26.7)

162

2.4

2.3

N/A!

N/A

(280.6)

(26.7)

IntelliEPI (Cayman)

(20.1)

66

2.6

2.2

18.8

13.3

125.4

30.2

LandMark Optoelectronics

(9.1)

900

10.7

8.2

21.5

15.9

46.6

30.1

Soitec

48.9

5,496

7.6

5.8

25.6

18.7

53.7

33.8

Visual Photonics Epitaxy

(22.7)

591

6.6

5.7

17.6

14.9

31.4

25.0

WIN Semiconductors

13.8

4,973

5.7

5.2

12.4

11.7

21.0

20.4

Opto-electronics

II-VI

92.4

6,719

2.6

2.4

10.6

9.5

19.0

16.8

EMCORE

38.5

124

0.9

0.8

1,309.1

13.1

(23.0)

35.1

Lumentum Holdings

5.1

6,293

3.2

2.9

9.1

8.4

13.5

12.2

Mean – Epitaxy and Opto-electronics

4.7

3.9

16.5

13.2

44.4

25.5

IntelliEPI Inc (Cayman)

(20.1)

66

2.6

2.2

18.8

13.3

125.4

30.2

LandMark Optoelectronics

(9.1)

900

10.7

8.2

21.5

15.9

46.6

30.1

Visual Photonics Epitaxy

(22.7)

591

6.6

5.7

17.6

14.9

31.4

25.0

Mean – VCSELs

6.6

5.4

19.3

14.7

67.8

28.4

IQE

23.1

$672m

3.0

2.8

17.1

13.5

163.7

54.4

Source: Refinitiv, Edison Investment Research. Note: Prices at 23 November 2020. Grey shading indicates exclusion from mean. IQE’s EBITDA includes losses from JV.

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 that 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-strapped 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

170,621

183,307

Adjusted Cost of Sales

(119,536)

(119,145)

(134,000)

(138,427)

Adjusted Gross Profit

36,755

20,870

36,621

44,880

EBITDA

 

 

26,404

16,246

30,281

38,209

Depreciation and Amortisation

(12,882)

(22,289)

(24,468)

(25,418)

Operating Profit (before amort. and except.)

 

 

16,040

(4,676)

6,113

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)

(3,783)

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)

4,213

11,991

Profit Before Tax (FRS 3)

 

 

6,747

(24,948)

(5,683)

11,441

Reported tax

(5,558)

(10,180)

1,826

(2,278)

Profit After Tax (norm)

11,229

(19,010)

3,413

9,713

Profit After Tax (FRS 3)

1,189

(35,128)

(3,857)

9,163

Average Number of Shares Outstanding (m)

761.8

787.2

797.2

800.1

EPS - normalised (p)

 

 

1.38

(2.46)

0.38

1.16

EPS - (IFRS) (p)

 

 

0.13

(4.51)

(0.53)

1.10

Dividend per share (p)

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

267,476

300,047

288,579

279,161

Intangible Assets

121,775

118,456

116,648

114,240

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

93,469

116,809

Stocks

35,709

30,668

33,189

40,177

Debtors

38,015

33,065

39,734

44,697

Cash

20,807

8,800

20,546

31,935

Other

0

0

0

0

Current Liabilities

 

 

(48,893)

(32,646)

(39,001)

(40,932)

Creditors

(48,893)

(27,529)

(33,884)

(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

273,556

285,547

CASH FLOW

Operating Cash Flow

 

 

16,988

8,948

26,346

28,189

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)

11,746

11,389

Opening net debt/(cash)*

 

 

(45,612)

(20,807)

63,948

52,202

HP finance leases initiated

0

0

0

0

Other

487

(51,769)

0

0

Closing net debt/(cash)*

 

 

(20,807)

63,948

52,202

40,813

Closing net debt/(cash) excluding finance leases

 

15,970

4,224

(7,165)

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 2020 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 2020 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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