Last close As at 05/08/2026
—
— 0.00 (0.00%)
Market capitalisation
—
Research: TMT
IQE has acquired the third-party shareholdings in its CSDC joint venture in Singapore for a nominal fee. This gives it control of the operation, which is currently loss making, enabling it to restructure the business and focus it on emerging sales opportunities in Asia for molecular beam epitaxy (MBE)-based products. Short term, the deal has a negative impact on earnings. We reduce our FY19 and FY20 EPS estimates by 8% and 5%, respectively.
Written by
IQE |
Optimising Asian operations |
Acquisition |
Tech hardware & equipment |
10 October 2019 |
Share price performance
Business description
Next events
Analysts
IQE is a research client of Edison Investment Research Limited |
|||||||||||||||||||||||||||||||||||||||||||||||
IQE has acquired the third-party shareholdings in its CSDC joint venture in Singapore for a nominal fee. This gives it control of the operation, which is currently loss making, enabling it to restructure the business and focus it on emerging sales opportunities in Asia for molecular beam epitaxy (MBE)-based products. Short term, the deal has a negative impact on earnings. We reduce our FY19 and FY20 EPS estimates by 8% and 5%, respectively.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/17 |
154.5 |
24.5 |
3.38 |
0.0 |
18.1 |
N/A |
12/18 |
156.3 |
14.0 |
1.38 |
0.0 |
44.3 |
N/A |
12/19e |
147.2 |
4.9 |
0.48 |
0.0 |
126.7 |
N/A |
12/20e |
179.0 |
23.0 |
2.29 |
0.0 |
26.7 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Taking control of Asian MBE manufacturing
CSDC was formed in 2015 as a joint venture between IQE’s Singapore subsidiary (51% stake), WIN Semiconductors (25%) and Nanyang Technological University and related parties (24%) with the intention of developing and commercialising MBE technologies for sale to customers in Asia. The operation generated SG$8.9m losses (c £5.3m) in FY18 because of under-utilisation of assets, including MBE reactors, and property lease obligations. The acquisition is for a nominal fee of US$1 to WIN Semiconductors and each of the other third-party shareholders payable in cash. Net liabilities attributable to CSDC at end FY18 were SG$15.4m (c £9.2m).
Pursuing Asian MBE opportunities
As CSDC is loss making and needs to secure significant new business to become profitable, which will take time, we reduce our PBT estimates by £0.5m and £1.5m for FY19 and FY20 respectively. Nevertheless, we view the transaction positively. Firstly, it enables IQE to restructure the operation and reduce losses. Secondly, it enables IQE to focus the development and manufacturing assets on MBE opportunities in Asia that are emerging because of the localisation of Asian technology supply chains in response to the US-China trade war. This includes epitaxy for 5G applications.
Valuation: Anticipating recovery in FY20
If we restrict our peer-based comparison to the three listed companies (IntelliEPI, LandMark Optoelectronics and Visual Photonics) offering epitaxy for VCSELs, then IQE is trading below the mean for these three stocks with respect to Y2 EV/EBITDA (11.2x vs 13.5x) and above the mean with respect to Y2 P/E (26.7x vs 24.6x), although it is below Visual Photonics (26.7x vs 29.1x), despite having a much stronger market position. Taking this approach, we see scope for share price recovery once global semiconductor supply chains have stabilised and the current period of destocking in the wireless market is over.
Exhibit 1: Financial summary
£'000s |
2017 |
2018 |
2019e |
2020e |
||
Year End 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
restated |
|||||
Revenue |
|
|
154,553 |
156,291 |
147,213 |
178,957 |
Cost of Sales (Inc D&A + SBP) |
(115,857) |
(111,748) |
(103,785) |
(126,165) |
||
Gross Profit |
38,696 |
44,543 |
43,428 |
52,792 |
||
EBITDA |
|
|
37,130 |
28,404 |
22,010 |
41,368 |
Depreciation and Amortisation |
(10,596) |
(12,364) |
(15,081) |
(18,381) |
||
Operating Profit (before amort. and except.) |
|
|
26,534 |
16,040 |
6,929 |
22,987 |
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 |
6,411 |
22,469 |
||
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 |
4,929 |
22,987 |
Profit Before Tax (FRS 3) |
|
|
15,095 |
6,747 |
4,411 |
22,469 |
Reported tax |
(435) |
(5,558) |
(794) |
(4,044) |
||
Profit After Tax (norm) |
24,998 |
11,229 |
4,135 |
18,942 |
||
Profit After Tax (FRS 3) |
14,660 |
1,189 |
3,617 |
18,424 |
||
Average Number of Shares Outstanding (m) |
689.5 |
761.8 |
786.6 |
792.9 |
||
EPS - normalised (p) |
|
|
3.38 |
1.38 |
0.48 |
2.29 |
EPS - (IFRS) (p) |
|
|
2.11 |
0.13 |
0.43 |
2.30 |
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
224,836 |
267,476 |
304,877 |
313,977 |
Intangible Assets |
108,513 |
121,775 |
127,467 |
131,860 |
||
Tangible Assets |
90,875 |
124,520 |
156,228 |
160,937 |
||
Other |
25,448 |
21,181 |
21,181 |
21,181 |
||
Current Assets |
|
|
111,925 |
94,531 |
55,168 |
73,600 |
Stocks |
33,044 |
35,709 |
34,000 |
40,694 |
||
Debtors |
33,269 |
38,015 |
36,380 |
43,636 |
||
Cash |
45,612 |
20,807 |
(15,211) |
(10,731) |
||
Other |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(44,916) |
(48,893) |
(43,721) |
(50,184) |
Creditors |
(44,916) |
(48,893) |
(43,721) |
(50,184) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
||
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 |
312,489 |
333,557 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
29,717 |
16,988 |
18,182 |
33,880 |
Net Interest |
(2,125) |
(66) |
0 |
0 |
||
Tax |
(5,844) |
(665) |
(1,200) |
(1,400) |
||
Capex |
(28,190) |
(42,362) |
(53,000) |
(28,000) |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
||
Financing |
94,912 |
813 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
88,470 |
(25,292) |
(36,018) |
4,480 |
||
Opening net debt/(cash) |
|
|
39,549 |
(45,612) |
(20,807) |
15,211 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
(3,309) |
487 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(45,612) |
(20,807) |
15,211 |
10,731 |
Source: IQE, Edison Investment Research
|
|
Research: Investment Companies
Atlantis Japan Growth Fund’s (AJG) lead adviser since May 2016 is Taeko Setaishi of Atlantis Investment Research Corporation; during her tenure AJG has outperformed the benchmark Tokyo Price Index (TOPIX) in both NAV and share price terms. Over time, AJG’s board has simplified the company’s structure. Recently it announced it will no longer offer a six-monthly redemption facility; instead it will pay a quarterly dividend based on the fund’s NAV, which will be paid out of revenue and capital. The board believes that this could broaden AJG’s appeal for investors seeking Japanese equity exposure.