IQE |
Revenue diversification driving growth |
Trading update |
Tech hardware & equipment |
21 July 2016 |
Share price performance
Business description
Next events
Analysts
IQE is a research client of Edison Investment Research Limited |
IQE’s ability to apply its epitaxial IP to multiple market segments is expected to deliver year-on-year revenue growth of over 15% for H116. In yesterday’s trading statement, management states that the group is on track to achieve full-year expectations. We leave our estimates unchanged, noting that this confirmation of growth through diversification should help catalyse an upwards rerating of the shares.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/14 |
112.0 |
16.2 |
2.42 |
0.00 |
9.1 |
N/A |
12/15 |
114.0 |
17.6 |
2.60 |
0.00 |
8.5 |
N/A |
12/16e |
122.0 |
19.0 |
2.75 |
0.00 |
8.0 |
N/A |
12/17e |
127.8 |
21.9 |
3.16 |
0.00 |
6.7 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Demonstrating benefits of diversification strategy
The key driver of the strong H116 revenue growth is the Photonics business. This is expected to show double-digit growth during H116, as multiple applications have started to transition to volume production. Growth is being driven by an increasing demand for VCSELs (vertical cavity lasers) in data communications, gesture recognition in consumer devices and industrial heating applications and for InP (indium phosphide) lasers in fibre optic communication systems. Photonics revenues are typically higher margin than those derived from wireless applications, so this trend is expected to have a beneficial impact on profits as well. Reassuringly, wireless revenues showed a small year-on-year increase, suggesting that the segment has stabilised. The move to leverage IP through involvement in JVs is also paying off, with licence income expected to total c £3.5m for the period.
Trading update provides support for estimates
A 15% increase in H116’s revenues (£53.2m to £61.2m) puts IQE in a good position to achieve our FY16 estimates. The business is typically weighted towards the second half because of customer ordering patterns. Moreover, the progress made on new product development and qualifications during H1 should result in additional volume business in H2. Brexit is not expected to have a material impact other than currency fluctuations – over 90% revenues are denominated in US$.
Valuation: Diversification key to rerating
IQE’s rating is undemanding and remains at a substantial discount to its peers. In our March note we identified the potential catalysts for an upwards rerating of the shares as continued revenue diversification, improvement in cash conversion as the RFMD wafer discount tapers off (completing FY16) and strengthening of the balance sheet as the final tranche of deferred consideration for Kopin is paid (completed H116). With wireless revenues stable and all three of these catalysts now present or close, the start of an upwards rerating should not, in our opinion, be far off.
Exhibit 1: Financial summary
£'000s |
2014 |
2015 |
2016e |
2017e |
||
Year End 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
112,011 |
114,024 |
122,043 |
127,836 |
Cost of Sales (Inc D&A + SBP) |
(80,459) |
(81,585) |
(89,092) |
(92,042) |
||
Gross Profit |
31,552 |
32,439 |
32,952 |
35,794 |
||
EBITDA |
|
|
27,009 |
29,001 |
31,169 |
34,469 |
Depreciation and Amortisation |
(9,391) |
(10,024) |
(10,800) |
(11,600) |
||
Operating Profit (before amort. and except.) |
|
|
17,618 |
18,977 |
20,369 |
22,869 |
Acquired Intangible Amortisation |
(1,101) |
(1,208) |
(1,208) |
(1,208) |
||
Exceptionals |
(7,892) |
5,398 |
0 |
0 |
||
Share based payments |
(1,458) |
(2,001) |
(2,001) |
(2,001) |
||
Operating Profit |
7,167 |
21,166 |
17,160 |
19,660 |
||
Underlying interest |
(1,429) |
(1,403) |
(1,343) |
(1,007) |
||
Exceptionals |
(495) |
(387) |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
16,189 |
17,574 |
19,027 |
21,862 |
Profit Before Tax (FRS 3) |
|
|
5,243 |
19,376 |
15,818 |
18,653 |
Tax |
(3,247) |
773 |
500 |
500 |
||
Profit After Tax (norm) |
16,701 |
18,066 |
19,027 |
21,862 |
||
Profit After Tax (FRS 3) |
1,996 |
20,149 |
16,318 |
19,153 |
||
Average Number of Shares Outstanding (m) |
650.8 |
662.6 |
669.7 |
671.1 |
||
EPS - normalised fully diluted (p) |
|
|
2.42 |
2.60 |
2.75 |
3.16 |
EPS - (IFRS) (p) |
|
|
0.3 |
3.0 |
2.4 |
2.9 |
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
||
Gross Margin (%) |
28.2 |
28.4 |
27.0 |
28.0 |
||
EBITDA Margin (%) |
24.1 |
25.4 |
25.5 |
27.0 |
||
Operating Margin (before GW and except.) (%) |
15.7 |
16.6 |
16.7 |
17.9 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
160,999 |
174,207 |
171,699 |
168,391 |
Intangible Assets |
82,079 |
86,843 |
87,135 |
87,027 |
||
Tangible Assets |
66,588 |
65,154 |
62,354 |
59,154 |
||
Other |
12,332 |
22,210 |
22,210 |
22,210 |
||
Current Assets |
|
|
48,323 |
48,909 |
48,328 |
75,690 |
Stocks |
18,276 |
21,215 |
22,000 |
23,900 |
||
Debtors |
24,463 |
23,050 |
24,000 |
27,000 |
||
Cash |
5,584 |
4,644 |
2,328 |
24,790 |
||
Other |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(46,667) |
(48,050) |
(42,857) |
(45,757) |
Creditors |
(31,947) |
(44,809) |
(39,616) |
(42,516) |
||
Short term borrowings |
(14,720) |
(3,241) |
(3,241) |
(3,241) |
||
Long Term Liabilities |
|
|
(41,480) |
(28,032) |
(28,032) |
(28,032) |
Long term borrowings |
(22,115) |
(24,626) |
(24,626) |
(24,626) |
||
Other long term liabilities |
(19,365) |
(3,406) |
(3,406) |
(3,406) |
||
Net Assets |
|
|
121,175 |
147,034 |
149,138 |
170,292 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
14,861 |
20,971 |
18,741 |
32,469 |
Net Interest |
(1,428) |
(1,403) |
(1,343) |
(1,007) |
||
Tax |
1,258 |
(459) |
500 |
500 |
||
Capex |
(9,426) |
(10,002) |
(9,500) |
(9,500) |
||
Acquisitions/disposals |
0 |
0 |
(11,691) |
0 |
||
Financing |
278 |
544 |
977 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
5,543 |
9,651 |
(2,316) |
22,462 |
||
Opening net debt/(cash) |
|
|
34,351 |
31,251 |
23,223 |
25,539 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
(2,443) |
(1,623) |
0 |
0 |
||
Closing net debt/(cash) |
|
|
31,251 |
23,223 |
25,539 |
3,077 |
Source: IQE, Edison Investment Research
|