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Last close As at 02/06/2023
-33.10
▲ 3.95 (13.55%)
Market capitalisation
266m
Research: TMT
IQE’s reduced guidance for FY19 revenues of £136–142m (vs £140–160m previously) reflects primarily the greater than anticipated disruption to its major US wireless customers as a result of the US/China trade war. There is good evidence to support a recovery in the medium term: the qualification of products and tools in the Asian supply chain for both 3D sensing and wireless RF is encouraging, while exposure to 5G remains attractive. However, the timing of a recovery is difficult to gauge and with Q120 expected to be seasonally quiet we downgrade our FY19 and FY20 revenue estimates by 5.3% and 15% respectively, with FY19 EPS reduced from a 0.5p profit to a 0.8p loss and FY20 EPS reduced from 2.3p to 0.3p.
IQE |
Continued impact from supply chain disruption |
Trading update |
Tech hardware & equipment |
19 November 2019 |
Share price performance
Business description
Next events
Analysts
IQE is a research client of Edison Investment Research Limited |
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IQE’s reduced guidance for FY19 revenues of £136–142m (vs £140–160m previously) reflects primarily the greater than anticipated disruption to its major US wireless customers as a result of the US/China trade war. There is good evidence to support a recovery in the medium term: the qualification of products and tools in the Asian supply chain for both 3D sensing and wireless RF is encouraging, while exposure to 5G remains attractive. However, the timing of a recovery is difficult to gauge and with Q120 expected to be seasonally quiet we downgrade our FY19 and FY20 revenue estimates by 5.3% and 15% respectively, with FY19 EPS reduced from a 0.5p profit to a 0.8p loss and FY20 EPS reduced from 2.3p to 0.3p.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/17** |
154.6 |
24.5 |
3.4 |
0.0 |
14 |
N/A |
12/18 |
156.3 |
14.0 |
1.4 |
0.0 |
33 |
N/A |
12/19e |
139.4 |
(8.0) |
(0.8) |
0.0 |
N/A |
N/A |
12/20e |
152.1 |
3.0 |
0.3 |
0.0 |
162 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Restated.
Customers disrupted
The weakness stems largely from the disruption to wireless handset supply chains caused by the US/China trade war, particularly the Huawei US ban. IQE’s revenues for its wireless (RF) products have historically been US weighted and IQE had already adjusted guidance due to trading disruption, but this has been greater than expected, exacerbated by destocking. The company also highlights that demand for Indium Phosphide lasers for the datacom/telecom market has remained weak, with demand reductions from one particular US player in this arena also a major factor.
Good support for a recovery but timing uncertain
Looking through this disruption, there is evidence to support a firm trading recovery. IQE’s global footprint means it can address both the US and Asian supply chains. It has qualified three tools for the Asian wireless market at its Taiwanese facility and is qualifying two more with a Taiwanese OEM. IQE remains well positioned to benefit from 5G and management reports good progress in developing switches and filters for the 5G market. In photonics/3D sensing, orders from IQE’s major VCSEL customer have been consistently strong. Management is confident the business has retained its lead in 3D sensing, reporting good progress across a number of Android supply chains, including two recently announced Android product qualifications.
Valuation: Discounted EV/sales on lower estimates
Our estimate changes (detailed overleaf) reflect continued growth in photonics but a slight reduction in wireless revenues in 2020 due to the uncertainty in timing of a recovery in this business line. While we forecast of losses for FY19 and a marginal profit for FY20, the company’s EV/sales rating is now a discount to peers. We still believe that IQE has built a capability set to drive sustained, more diversified growth. Further progress in the Asian/Android supply chains will be key to building investor confidence in this and driving a recovery in the share price.
Estimate changes and valuation
Estimate revisions
Our estimate revisions are shown in Exhibit 1. Our FY19 revenue estimate of £139.4m is broadly the mid-point of the revised £136m to £142m guidance range, whereas the 15% reduction to our FY20 estimate (9% growth) essentially reflects a cautious stance on the timing of a recovery driven by sales into the Asian and Android supply chains.
With a highly operationally geared model, the revenue reduction drops strongly through to earnings. Visibility is clearly low, but we now forecast the business to be loss-making at the PBT level in FY19 and marginal profitability in FY20. Success with the Asian initiatives and ongoing execution in 5G and Photonics should support operationally geared growth into FY2021.
Capex is expected to be towards the lower end of the previous £30–40m range (Edison £31m, excluding capitalised development), but with the infrastructure phase of capacity expansion now complete, capex levels will reduce and are expected to be much more linear with revenue progression. Our forecasts for year-end net debt have increased but we note that the increase in total debt facilities to around £57m, which was announced in June, provides good headroom and could support further investment if required.
Exhibit 1: Estimate revisions
FY18 |
FY19e |
FY20e |
|||||
Actual |
Old |
New |
% change |
Old |
New |
% change |
|
Revenue (£m) |
156.3 |
147.2 |
139.4 |
-5.3% |
179.0 |
152.1 |
-15.0% |
EBITDA (£m) |
28.4 |
22.0 |
9.1 |
-58.7% |
41.4 |
20.9 |
-49.4% |
Adjusted PBT (£m) |
14.0 |
4.9 |
(8.0) |
-262.3% |
23.0 |
3.0 |
-86.9% |
Adjusted EPS (p) |
1.38 |
0.48 |
(0.82) |
-270.9% |
2.29 |
0.28 |
-87.6% |
Capitalised R&D (£m) |
12.0 |
13.0 |
13.0 |
0.0% |
13.0 |
13.0 |
0.0% |
PPE (£m) |
30.4 |
40.0 |
31.0 |
-22.5% |
15.0 |
9.0 |
-40.0% |
Net (cash)/debt (£m) |
(20.8) |
15.2 |
17.6 |
15.4% |
10.7 |
21.6 |
100.9% |
Source: IQE data, Edison Investment Research estimates
Exhibit 2: Revenue model
2018 |
2019e |
2020e |
|
Wireless (£m) |
87.9 |
61.5 |
60.9 |
Photonics (£m) |
66.8 |
75.9 |
89.2 |
CMOS++ (£m) |
1.6 |
1.9 |
2.0 |
Total (£m) |
156.3 |
139.4 |
152.1 |
Growth |
|||
Wireless |
-30% |
-1% |
|
Photonics |
14% |
18% |
|
CMOS++ |
20% |
5% |
|
Total |
1% |
-11% |
9% |
Source: IQE data, Edison Investment Research estimates
Valuation: Recovery not priced in
We include a comparative valuation of IQE versus its broader (if imperfect) peer group below. Our forecasts of losses this year and marginal profitability next year renders a relative P/E valuation meaningless. With the shares having fallen c 38% since 1 November, on an EV/sales basis, IQE is now trading at a discount to most peers. In particular it is worth highlighting the re-rating upwards of VPEC, IQE’s Taiwanese peer, which has been benefiting from an upgrade trajectory and re-rating upwards due to its beneficial near-term exposure to the Asian supply chain.
We still believe that IQE has built a product portfolio with the potential to drive sustained and more diversified growth in the medium to long term. Establishing investor confidence in this will be key to a share price recovery. We will look for further evidence that IQE is building customer, product and then revenue traction in the Asian/Android supply chain as the first milestones in this regard. Further progress in 5G and the customer wins for the company’s nanoimprint lithography could also provide encouraging lead indicators over the next 12–18 months.
Exhibit 3: Peer valuations
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 Inc |
203 |
2.5 |
2.3 |
N/A |
N/A |
23.4 |
18.9 |
|
IntelliEPI Inc (Cayman) |
82 |
3.2 |
2.8 |
16.6 |
11.1 |
34.4 |
25.0 |
|
LandMark Optoelectronics Corp |
758 |
9.8 |
7.8 |
21.6 |
15.3 |
45.1 |
28.8 |
|
Soitec SA |
3,839 |
5.9 |
4.8 |
19.7 |
15.4 |
31.7 |
24.9 |
|
Visual Photonics Epitaxy Co Ltd |
752 |
9.3 |
7.4 |
25.2 |
19.6 |
41.9 |
31.0 |
|
WIN Semiconductors Corp |
4,506 |
6.6 |
5.4 |
15.7 |
12.5 |
31.8 |
23.2 |
|
Opto-electronics |
||||||||
II-VI Inc |
2,675 |
2.1 |
1.7 |
13.7 |
9.1 |
15.9 |
9.9 |
|
EMCORE Corp |
91 |
0.8 |
0.6 |
(9.2) |
268.6 |
(6.4) |
(16.6) |
|
Lumentum Holdings Inc |
5,319 |
3.1 |
2.8 |
9.6 |
8.6 |
14.1 |
12.4 |
|
Mean – Epitaxy and Opto-electronics |
4.8 |
3.9 |
17.4 |
13.1 |
29.8 |
21.8 |
||
IntelliEPI Inc (Cayman) |
82 |
3.2 |
2.8 |
16.6 |
11.1 |
34.4 |
25.0 |
|
LandMark Optoelectronics Corp |
758 |
9.8 |
7.8 |
21.6 |
15.3 |
45.1 |
28.8 |
|
Visual Photonics Epitaxy Co Ltd |
752 |
9.3 |
7.4 |
25.2 |
19.6 |
41.9 |
31.0 |
|
Mean – VCSELs |
7.4 |
6.0 |
21.1 |
15.3 |
40.4 |
28.3 |
||
IQE Plc |
$476m |
2.5 |
2.3 |
38.0 |
16.5 |
(55.8) |
161.9 |
|
Source: Edison Investment Research, Factset. Note: Prices as at 19 November.
Exhibit 4: Financial summary
£'000s |
2017 |
2018 |
2019e |
2020e |
||
Year End 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
restated |
|||||
Revenue |
|
|
154,553 |
156,291 |
139,361 |
152,123 |
Cost of Sales (Inc D&A + SBP) |
(115,857) |
(111,748) |
(117,063) |
(116,374) |
||
Gross Profit |
38,696 |
44,543 |
22,298 |
35,749 |
||
EBITDA |
|
|
37,130 |
28,404 |
9,081 |
20,931 |
Depreciation and Amortisation |
(10,596) |
(12,364) |
(15,081) |
(17,931) |
||
Operating Profit (before amort. and except.) |
|
|
26,534 |
16,040 |
(6,000) |
3,000 |
Acquired Intangible Amortisation |
(1,429) |
(518) |
(518) |
(518) |
||
Exceptionals |
(385) |
(7,906) |
0 |
0 |
||
Share based payments |
(7,526) |
1,044 |
0 |
0 |
||
Operating Profit |
17,194 |
8,660 |
(6,518) |
2,482 |
||
Underlying interest |
(2,019) |
(66) |
0 |
0 |
||
Exceptionals and losses from JVs |
80 |
(1,847) |
(2,000) |
0 |
||
Profit Before Tax (norm) |
|
|
24,515 |
13,974 |
(8,000) |
3,000 |
Profit Before Tax (FRS 3) |
|
|
15,095 |
6,747 |
(8,518) |
2,482 |
Reported tax |
(435) |
(5,558) |
1,533 |
(447) |
||
Profit After Tax (norm) |
24,998 |
11,229 |
(6,467) |
2,553 |
||
Profit After Tax (FRS 3) |
14,660 |
1,189 |
(6,985) |
2,035 |
||
Average Number of Shares Outstanding (m) |
689.5 |
761.8 |
787.3 |
795.9 |
||
EPS - normalised (p) |
|
|
3.38 |
1.38 |
(0.82) |
0.28 |
EPS - (IFRS) (p) |
|
|
2.11 |
0.13 |
(0.92) |
0.23 |
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
224,836 |
267,476 |
295,877 |
299,427 |
Intangible Assets |
108,513 |
121,775 |
127,467 |
131,860 |
||
Tangible Assets |
90,875 |
124,520 |
147,228 |
146,387 |
||
Other |
25,448 |
21,181 |
21,181 |
21,181 |
||
Current Assets |
|
|
111,925 |
94,531 |
79,067 |
80,130 |
Stocks |
33,044 |
35,709 |
32,187 |
34,592 |
||
Debtors |
33,269 |
38,015 |
34,439 |
37,093 |
||
Cash |
45,612 |
20,807 |
12,441 |
8,445 |
||
Other |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(44,916) |
(48,893) |
(71,548) |
(75,079) |
Creditors |
(44,916) |
(48,893) |
(41,548) |
(45,079) |
||
Short term borrowings |
0 |
0 |
(30,000) |
(30,000) |
||
Long Term Liabilities |
|
|
(666) |
(3,836) |
(3,836) |
(3,836) |
Long term borrowings |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
(666) |
(3,836) |
(3,836) |
(3,836) |
||
Net Assets |
|
|
291,179 |
309,278 |
299,560 |
300,642 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
29,717 |
16,988 |
6,834 |
19,404 |
Net Interest |
(2,125) |
(66) |
0 |
0 |
||
Tax |
(5,844) |
(665) |
(1,200) |
(1,400) |
||
Capex |
(28,190) |
(42,362) |
(44,000) |
(22,000) |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
||
Financing |
94,912 |
813 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
88,470 |
(25,292) |
(38,366) |
(3,996) |
||
Opening net debt/(cash) |
|
|
39,549 |
(45,612) |
(20,807) |
17,559 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
(3,309) |
487 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(45,612) |
(20,807) |
17,559 |
21,555 |
Source: Company data, Edison Investment Research. Note: Capex shown above includes capitalised R&D.
|
|
Research: Financials
OTC Market’s (OTCM) third-quarter results were consistent with our expectations and showed healthy revenue progress in each segment. This is a year of investment for the group in people, IT, a new headquarters and acquired businesses. Earnings are set to fall as a result, but we expect growth to resume in FY20 with longer-term benefits also likely to flow from the enhanced capabilities and infrastructure.
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