“Edison’s accessible and high-quality research gives us the opportunity to communicate an independent perspective of Tyman to a wide variety of potential stakeholders.”
Currency in -
Last close As at 02/06/2023
-33.10
▲ 3.95 (13.55%)
Market capitalisation
266m
Research: TMT
IQE’s FY17 results confirm that the photonics volume ramp-up referred to in the pre-close update has delivered the strong growth in revenues (16%) and PBT (18%) that was expected. Based on management’s guidance for this growth trend to continue, we upgrade our FY18 estimates and note the potential for sustained growth over the next three to five years.
IQE |
Doubling in photonics revenues drives growth |
FY17 results |
Tech hardware & equipment |
29 March 2018 |
Share price performance
Business description
Next events
Analysts
IQE is a research client of Edison Investment Research Limited |
|||||||||||||||||||||||||||||||||||||||||||||||
IQE’s FY17 results confirm that the photonics volume ramp-up referred to in the pre-close update has delivered the strong growth in revenues (16%) and PBT (18%) that was expected. Based on management’s guidance for this growth trend to continue, we upgrade our FY18 estimates and note the potential for sustained growth over the next three to five years.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/16** |
132.7 |
20.6 |
2.89 |
0.0 |
43.9 |
N/A |
12/17 |
154.5 |
24.3 |
3.36 |
0.0 |
37.8 |
N/A |
12/18e |
174.9 |
32.8 |
3.63 |
0.0 |
35.0 |
N/A |
12/19e |
203.8 |
42.3 |
4.63 |
0.0 |
27.4 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Restated.
iPhone X shipments boost H217 revenues
Total revenues rose by 16% to £154.5m y-o-y, slightly ahead of our £150.1m estimate. The 21% rise in wafer sales was predominantly driven by volume ramp-up during H217 of VCSEL programmes which we infer relate to the iPhone X. Photonics revenues doubled while wireless revenues were flat. As we expected, licence fees were significantly lower than in FY16 (£1.9m vs.£6.7m) as the prior year benefited from one-off payments received during the initial phases of the JVs. Adjusted PBT rose by 18% to £24.3m, also slightly ahead of our £23.7m estimate. The group moved from £39.5m net debt at end FY16 to £45.6m net cash at end FY17 following a Placing at 140p/share raising £95m (gross) to finance additional capacity and development work to support expected demand in photonics.
Photonics guidance underpins estimates upgrade
Management estimates that existing volume programmes will deliver 35-60% growth in photonics revenues during FY18. We take a relatively cautious approach, modelling a 40% y-o-y increase in both FY18 and FY19 (FY19 estimates are presented for the first time), but even this necessitates an upwards revision to our FY18 estimates. Management estimates that programmes under development are likely to deliver 40-60% CAGR for photonics revenues over the next three to five years. These include VCSELs for consumer applications such as hand and body tracking, collision avoidance systems, data communications and industrial applications such as heating, indium phosphide wafers for high speed data networks and infrared sensitive wafers for healthcare applications.
Valuation: Growth already priced in
Our analysis of prospective P/E multiples for listed peers indicates that the current price assumes that IQE will perform at the top end of management guidance during FY18 and FY19. It indicates potential for share price appreciation if some of the other programmes under development move into volume production in the next 12-18 months, making management’s guidance appear too conservative.
FY17 results, guidance and changes to estimates
Management guidance
For the first time management has provided detailed guidance of segmental revenue growth for the current year and over a three- to five-year time horizon. This guidance is summarised in Exhibit 1, together with the growth rates adopted in Edison’s estimates, those programmes included in the guidance and those presenting upside to the guidance.
Exhibit 1: Management revenue guidance
FY18 guidance |
Included in guidance |
Upside to guidance |
FY18e Edison |
FY19e Edison |
|
Wireless growth |
0-5% |
Existing programmes, some restocking, GaN-on-SiC for base-stations |
GaN-on-Si for base-stations |
1.5% |
1.5% |
Photonics growth |
35-60% |
Existing programmes |
VCSELs for other mobile phone vendors , VCSELs for other volume applications, InP for communications applications (H218 onwards) |
40.0% |
40.0% |
Infrared growth |
5-15% |
Night vision and other defence applications |
Consumer applications |
7.0% |
7.0% |
Power growth |
N/A |
None |
None |
None |
None |
Solar growth |
N/A |
None |
Satellite applications (FY19 onwards) |
None |
None |
3-5 year guidance |
Included in guidance |
Upside to guidance |
|||
Wireless growth |
0-10% CAGR |
Existing programmes, GaN-on-SiC for base-stations, GaN-on-Si for base-stations |
Filters and switches, Integrated front-end modules |
||
Photonics growth |
40-60% CAGR |
Existing programmes, VCSELs for other mobile phone vendors, VCSELs for other volume applications, InP for communications applications |
Integrated optical modules |
||
Infrared growth |
5-15% CAGR |
Defence and consumer applications |
- |
||
Power growth |
N/A |
None |
Power switches |
||
Solar growth |
N/A |
None |
Satellite applications |
Source: Edison Investment Research, company statements
FY17 results and changes to estimates
Exhibit 2: Summary of changes to estimates
FY17 |
FY18e |
FY19e |
|||||
Est. |
Actual |
% change |
Old |
New |
% change |
||
Revenue (£m) |
150.1 |
154.5 |
2.9% |
165.2 |
174.9 |
5.8% |
203.8 |
EBITDA (£m) |
35.5 |
38.4 |
8.2% |
40.3 |
47.9 |
18.9% |
59.0 |
Adjusted PBT (£m) |
23.7 |
24.3 |
2.5% |
28.3 |
32.8 |
16.1% |
42.3 |
Adjusted EPS (p) |
3.26 |
3.36 |
3.0% |
3.56 |
3.63 |
2.0% |
4.63 |
Capitalised R&D |
15.0 |
16.9 |
12.9% |
9.0 |
9.0 |
0.0% |
0.0 |
Capital Expenditure |
20.0 |
18.0* |
-10.0% |
26.0 |
26.0 |
0.0% |
0.0 |
Net cash |
37.1 |
45.6 |
22.8% |
35.6 |
48.1 |
35.1% |
68.1 |
Source: Company accounts, Edison Investment Research. Note: *Including £6.7m funded through finance leases.
Revenues: we have raised our assumptions for photonics growth and infrared growth in FY18 so that both metrics are in line with management’s guidance, leaving our assumption for wireless growth unchanged. This results in changes to FY18 estimates as summarised in Exhibit 2. Since management’s guidance for FY18 includes only those programmes currently in commercial production, we infer that it only includes VCSELs (vertical cavity surface emitting lasers) for the face recognition function on the iPhone X, not the proposed rear-facing camera for capturing details of the surroundings for use in Augmented Reality/Virtual Reality applications. As this rear-facing camera requires a much smaller VCSEL array than the face recognition function, volume ramp-up for this function will not have as significant effect on photonics revenue growth as the current volume programme.
Operating margins: since photonics is growing much more strongly than the other segments, the proportion of revenues attributable to this activity increases in prominence, so we expect photonics sales to become similar to those from the wireless segment by FY19 (Exhibit 3). Management has given detailed information on segmental operating margin for the first time. As photonics revenues generate a substantially higher operating margin than wireless revenues (38% vs 15% in FY17), we expect this shift to have a beneficial effect on margins.
Tax: we apply an effective tax rate of 15% in both FY18 and FY19 (previously 0% in FY18).
Cash conversion: IQE exhibits relatively good levels of cash conversion: 113% in FY17 and 102% in FY16. Our updated model assumes cash conversion in FY18 and FY19 will be maintained at similar levels to FY17.
Capital expenditure: capital expenditure totalled £18.0m (including £6.7m funded through finance leases) in FY17, c £10m of which related to maintenance, as IQE began to add capacity to support further growth in VCSEL production. The first five new reactors are already in place at the new “Mega-Foundry” site in Cardiff and are on track to commence production in H218. A further five reactors (c $3m cost/reactor) are on order for installation and commissioning by the end of Q318. If demand warrants it, a further 10 reactors may be purchased over the next 12 to 18 months. The Mega Foundry premises are being funded through the Cardiff Region City Deal and have the capacity to host up to 100 reactors, which is similar to the number that IQE already has across its sites in Cardiff, Pennsylvania and Singapore (through its JV there). The payback period on a fully utilised reactor is around a year, so as epitaxy requirements increase, the cash generated from existing tools should be sufficient to purchase additional units without recourse to further financing. We expect that the first five new reactors will be used to satisfy iPhone X requirements, but if demand from this programme is lower than management expects, IQE will be able to use the reactors for other VCSEL programmes or indeed other types of epitaxy. We model £26.0m capex (unchanged) in FY18 and £19.0m in FY19.
Investment in intangible assets: during FY17 IQE increased its investment in product development from £6.3m to £14.5m, primarily reflecting development work on VCSEL programmes, only one of which has moved into volume production so far. There was also £2.4m invested in patenting internally generated IP and purchasing patents from third parties, most recently 54 patents relating to Quasi Photonics Crystals in December 2017. These will help IQE integrate complete 3D sensing systems incorporating a VCSEL light source, wafer level optic, diffractive optical element and silicon light sensor on a single chip. We model annual R&D costs at £9.0m in both FY18 and FY19, as each programme IQE works on with a client requires customised epitaxy which must be qualified before it passes into volume production.
|
Exhibit 3: Segmental revenues |
|
|
Source: Company accounts, Edison Investment Research |
Valuation
The share price has declined from the peak of 178.75p reached in November 2017 but is still more than double the level it was a year ago. At the current price of 126.9p, the shares are trading at a premium to the mean for its peers on all metrics (Exhibit 4).
Exhibit 4: Peer multiple analysis
Name |
Market cap |
EV/Sales 1FY (x) |
EV/Sales 2FY (x) |
EV/EBITDA 1FY (x) |
EV/EBITDA 2FY (x) |
P/E 1FY |
P/E 2FY |
Epitaxy |
|||||||
GCS HOLDINGS |
211 |
2.3 |
- |
10.1 |
- |
14.4 |
- |
INTELLIEPI |
115 |
3.2 |
- |
12.8 |
- |
22.2 |
18.3 |
LAND MARK OPTOELECTRONICS |
1,196 |
11.5 |
8.4 |
19.4 |
13.0 |
31.6 |
21.0 |
S.O.I.T.E.C. |
2,370 |
6.1 |
4.6 |
24.3 |
16.3 |
43.2 |
27.3 |
VISUAL PHOTONICS EPITAXY CO |
704 |
7.6 |
6.9 |
24.0 |
18.8 |
35.8 |
30.0 |
WIN SEMICONDUCTORS CORP |
4,464 |
5.9 |
4.9 |
13.9 |
11.0 |
25.3 |
19.8 |
Opto-electronics |
|||||||
II-VI INC |
2,665 |
2.6 |
2.2 |
- |
- |
25.7 |
17.8 |
EMCORE CORP |
156 |
0.9 |
0.8 |
9.4 |
5.9 |
31.4 |
15.3 |
FINISAR CORPORATION |
1,801 |
1.0 |
1.0 |
6.3 |
5.9 |
16.8 |
16.8 |
LUMENTUM HOLDINGS |
4,156 |
3.2 |
2.5 |
12.8 |
9.5 |
19.1 |
14.4 |
Mean |
3.6 |
3.3 |
14.8 |
11.5 |
26.5 |
20.1 |
|
IQE |
1,374m |
5.2 |
4.5 |
19.1 |
15.5 |
35.0 |
27.4 |
Source: Bloomberg, Edison Investment Research estimates. Note: Grey shading indicates exclusion from mean. Prices as at 28 March 2018.
The size of this premium reduces if we adopt a higher photonics growth rate. However, even if we adopt a 60% growth rate in both FY18 and FY19, which is at the upper end of management guidance, the shares are trading at a premium to the mean P/E for FY18e (31.6x vs 26.5x for peers vs 35.0x Edison base case) but only slightly above the mean P/E for FY19e (22.0x vs 20.1x peers vs 27.4x Edison base case). This suggests that the share price already assumes that IQE will perform towards the high end of management guidance, presenting a risk to the share price if there are any concerns, founded or otherwise, regarding iPhone X sales. On the other hand, Exhibit 1 identifies several programmes which present upside to guidance, suggesting potential for share price appreciation if any of these move into volume production during our forecast period.
If we restrict the comparison to the three listed companies offering epitaxy for VCSELs: IntelliEPI, LandMark Optoelectronics and Visual Photonics, then IQE is trading on P/E multiples that are in line with those for Landmark, which is at the upper end of the three peers. Given that IQE has a much stronger market position than the other three (44% share compared with 7% for LandMark, 5% for Visual Photonics and less than 5% for IntelliEPI, a rating at the upper range of these three (Visual Photonics’ 35.8x for FY18 and 30.0x for FY19) seems reasonable. Taking this approach, the shares look fairly priced at current levels despite modelling fairly unambitious photonics growth in our estimates.
Exhibit 5: Analysis of effect of photonics growth on key financial metrics
Photonics revenue growth in each of FY18e and FY19e |
40% |
45% |
50% |
55% |
60% |
FY18e total revenues (£m) |
174.9 |
177.2 |
179.6 |
182.0 |
184.4 |
FY18e adjusted PBT (£m) |
32.8 |
33.8 |
34.7 |
35.6 |
36.5 |
FY18e adjusted EPS (p) |
4.08 |
4.19 |
4.30 |
4.42 |
4.53 |
Implied FY18e P/E (x) |
35.0 |
34.1 |
33.2 |
32.4 |
31.6 |
FY19e total revenues (£m) |
203.80 |
210.6 |
217.6 |
224.9 |
232.4 |
FY19e adjusted PBT (£m) |
42.3 |
44.8 |
47.4 |
50.2 |
53.0 |
FY19e adjusted EPS (p) |
5.25 |
5.57 |
5.89 |
6.23 |
6.58 |
Implied FY19e P/E (x) |
27.4 |
25.9 |
24.5 |
23.2 |
22.0 |
Source: Edison Investment Research
Exhibit 6: Financial summary
£'000s |
2016 |
2017 |
2018e |
2019e |
|
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
|
PROFIT & LOSS |
Restated |
||||
Revenue |
|
132,707 |
154,480 |
174,852 |
203,803 |
Cost of Sales (Inc D&A + SBP) |
(98,538) |
(115,857) |
(124,304) |
(142,976) |
|
Gross Profit |
34,169 |
38,623 |
50,548 |
60,827 |
|
EBITDA |
|
33,057 |
38,384 |
47,910 |
58,959 |
Depreciation and Amortisation |
(10,938) |
(12,025) |
(15,166) |
(16,699) |
|
Operating Profit (before amort. and except.) |
22,119 |
26,359 |
32,745 |
42,261 |
|
Acquired Intangible Amortisation |
(1,374) |
(1,429) |
(1,429) |
(1,429) |
|
Exceptionals |
1,962 |
(385) |
0 |
0 |
|
Share based payments |
(2,881) |
(7,526) |
(7,526) |
(7,526) |
|
Operating Profit |
19,826 |
17,019 |
23,790 |
33,306 |
|
Underlying interest |
(1,463) |
(2,099) |
100 |
0 |
|
Exceptionals |
(26) |
80 |
0 |
0 |
|
Profit Before Tax (norm) |
|
20,630 |
24,340 |
32,845 |
42,261 |
Profit Before Tax (FRS 3) |
|
18,363 |
14,920 |
23,890 |
33,306 |
Tax |
(340) |
(435) |
(3,583) |
(4,996) |
|
Profit After Tax (norm) |
20,692 |
24,823 |
29,261 |
37,265 |
|
Profit After Tax (FRS 3) |
18,023 |
14,485 |
20,306 |
28,310 |
|
Average Number of Shares Outstanding (m) |
671.5 |
689.5 |
756.1 |
756.1 |
|
EPS - normalised (p) |
|
2.89 |
3.36 |
3.63 |
4.63 |
EPS - (IFRS) (p) |
|
2.66 |
2.09 |
2.67 |
3.73 |
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
|
BALANCE SHEET |
|||||
Fixed Assets |
|
214,043 |
224,836 |
243,241 |
253,114 |
Intangible Assets |
103,972 |
108,513 |
108,418 |
106,791 |
|
Tangible Assets |
85,001 |
90,875 |
109,375 |
120,875 |
|
Other |
25,070 |
25,448 |
25,448 |
25,448 |
|
Current Assets |
|
64,323 |
111,559 |
126,250 |
163,644 |
Stocks |
28,498 |
33,707 |
39,534 |
46,117 |
|
Debtors |
30,868 |
32,240 |
38,581 |
49,451 |
|
Cash |
4,957 |
45,612 |
48,135 |
68,077 |
|
Other |
0 |
0 |
0 |
0 |
|
Current Liabilities |
|
(51,522) |
(44,916) |
(47,596) |
(55,232) |
Creditors |
(43,870) |
(44,916) |
(47,596) |
(55,232) |
|
Short term borrowings |
(7,652) |
0 |
0 |
0 |
|
Long Term Liabilities |
|
(39,021) |
(666) |
(666) |
(666) |
Long term borrowings |
(36,854) |
0 |
0 |
0 |
|
Other long term liabilities |
(2,167) |
(666) |
(666) |
(666) |
|
Net Assets |
|
187,823 |
290,813 |
321,229 |
360,860 |
CASH FLOW |
|||||
Operating Cash Flow |
|
22,463 |
29,717 |
38,423 |
49,142 |
Net Interest |
(1,489) |
(2,125) |
100 |
0 |
|
Tax |
(839) |
(5,844) |
(1,000) |
(1,200) |
|
Capex |
(19,060) |
(28,190) |
(35,000) |
(28,000) |
|
Acquisitions/disposals |
(11,250) |
0 |
0 |
0 |
|
Financing |
578 |
94,912 |
0 |
0 |
|
Dividends |
0 |
0 |
0 |
0 |
|
Net Cash Flow |
(9,597) |
88,470 |
2,523 |
19,942 |
|
Opening net debt/(cash) |
|
23,223 |
39,549 |
(45,612) |
(48,135) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
|
Other |
(6,729) |
(3,309) |
0 |
0 |
|
Closing net debt/(cash) |
|
39,549 |
(45,612) |
(48,135) |
(68,077) |
Source: Company accounts, Edison Investment Research
|
|
FY17 saw record core trading volumes, driven by continued strong demand in jet fuel markets and diversification into other oil products. While margin optimisation execution was more difficult in H217 as markets moved into backwardation, gross margins remained positive and partially recovered from the Q3 low by the year end. Combined with the improved associates’ contribution driven by strong air transport growth in China, prospects for renewed progress in FY18 are encouraging. The healthy balance sheet also positions the group to pursue development of its supply chain infrastructure globally, especially growth opportunities aligned with China’s One Belt, One Road trade route to Europe initiative. Our fair value currently stands at S$1.82.
Get access to the very latest content matched to your personal investment style.
