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-33.10
▲ 3.95 (13.55%)
Market capitalisation
266m
Research: TMT
IQE’s pre-close trading update notes a 16% year-on-year increase in wafer revenues in H117, driven by strong double-digit growth in photonics and currency tailwinds. Importantly, the photonics growth heralds the start of a mass-market ramp up in VCSEL (vertical cavity surface emitting laser) wafers for consumer applications, encouraging management to proceed with plans to substantially expand capacity ahead of anticipated demand in H218. We make modest upwards revisions to our estimates, noting the potential for further upgrades as there is greater clarity on photonics volumes.
IQE |
Start of mass market VCSEL ramp-up |
Trading update |
Tech hardware & equipment |
26 July 2017 |
Share price performance
Business description
Next events
Analysts
IQE is a research client of Edison Investment Research Limited |
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IQE’s pre-close trading update notes a 16% year-on-year increase in wafer revenues in H117, driven by strong double-digit growth in photonics and currency tailwinds. Importantly, the photonics growth heralds the start of a mass-market ramp up in VCSEL (vertical cavity surface emitting laser) wafers for consumer applications, encouraging management to proceed with plans to substantially expand capacity ahead of anticipated demand in H218. We make modest upwards revisions to our estimates, noting the potential for further upgrades as there is greater clarity on photonics volumes.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/15 |
114.0 |
17.6 |
2.60 |
0.0 |
40.2 |
N/A |
12/16 |
132.7 |
20.6 |
3.00 |
0.0 |
34.8 |
N/A |
12/17e |
145.3 |
23.5 |
3.27 |
0.0 |
32.0 |
N/A |
12/18e |
160.3 |
25.9 |
3.58 |
0.0 |
29.2 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Strong photonics growth
The strong photonics growth noted since FY14 has continued into H117. Importantly, part of this growth is attributable to the onset of deliveries of VCSEL wafers for multiple, multi-year contracts addressing mass-market consumer applications. This is in addition to continued work on a range of programmes which also have potential to become volume contracts in future. This includes VCSELs for other consumer applications including 3D sensing, data comms and industrial applications such as heating; InP (indium phosphide) wafers for high-speed data networks and GaN (gallium nitride) wafers for radio frequency and power applications. The 16% y-o-y increase in total wafer revenues to c £70m during H117 was helped by a 10% currency tailwind caused by the devaluation of sterling last June. There was also c £1m licence revenue.
Capacity expansion underpinned by demand
Noting higher levels of expected demand for H218 than it had initially anticipated, the board of IQE has committed to a capacity expansion plan. It is leasing new premises in South Wales and placed orders for the equipment that will initially be required. We note that if deliveries for the current volume VCSEL contracts do not ramp up as expected to utilise this capacity, it will be used to fulfil volume orders for other programmes as they reach the commercialisation phase.
Valuation: Share price reflects further upgrades
The share price has doubled since the interims in March as investors have speculated on the potential impact of volume VCSEL programmes on earnings. As a result, the shares already price in further upgrades. Based on our updated estimates, IQE currently trades at a 2018e P/E of 29x vs a sector average of 19x. In our September results note we plan to present a detailed scenario analysis considering the impact of a faster ramp up in VCSEL volumes on earnings and profit related multiples.
Changes to estimates
We have revised our estimates to reflect:
■
A modest ramp-up in VCSEL wafer volumes during H217 and into FY18 reflecting the onset of deliveries of VCSEL wafers for multiple, multi-year contracts addressing mass-market consumer applications. Previously our estimates excluded the potential impact of any of the VCSEL development programmes moving into volume production.
■
Higher fixed costs associated with supporting the ramp-up in VCSEL wafers
■
Higher levels of capitalised R&D associated with VCSEL activity
■
Higher levels of capex to support the VCSEL ramp-up
Exhibit 1: Revisions to estimates
Year end December |
FY16 |
FY17e |
FY18e |
||||
(£m) |
Old |
New |
% change |
Old |
New |
% change |
|
Revenue |
132.7 |
137.0 |
145.3 |
6.1% |
140.2 |
160.3 |
14.3% |
EBITDA |
31.7 |
34.5 |
35.5 |
2.8% |
35.0 |
39.7 |
13.2% |
Adjusted PBT |
20.6 |
22.5 |
23.5 |
4.4% |
24.0 |
25.9 |
7.6% |
Adjusted EPS (fully diluted) (p) |
3.00 |
3.15 |
3.27 |
3.7% |
3.37 |
3.58 |
6.5% |
Capitalised R&D |
8.1 |
5.5 |
11.0 |
100.0% |
5.5 |
7.5 |
36.4% |
PPE |
11.0 |
6.5 |
20.0 |
207.7% |
4.5 |
4.5 |
0.0% |
Net debt |
39.5 |
24.2 |
44.5 |
83.9% |
5.4 |
26.9 |
401.5% |
Source: Edison Investment Research
Valuation
Exhibit 2: Multiples of listed peers
Name |
Market cap ($m) |
EV/sales FY1 (x) |
EV/sales FY2 (x) |
EV/EBITDA FY1 (x) |
EV/EBITDA FY2 (x) |
P/E FY1 (x) |
P/E FY2 (x) |
Epitaxy |
|||||||
VISUAL PHOTONICS EPITAXY CO |
385 |
4.6 |
4.1 |
14.1 |
10.6 |
22.8 |
18.6 |
INTELLIEPI |
103 |
3.3 |
2.7 |
14.8 |
10.2 |
29.5 |
19.6 |
S.O.I.T.E.C. |
1,849 |
5.3 |
4.1 |
26.3 |
17.1 |
65.7 |
33.3 |
Wireless |
|||||||
BROADCOM |
103,437 |
6.6 |
6.1 |
12.2 |
11.3 |
16.1 |
14.9 |
QORVO |
8,603 |
2.8 |
2.6 |
8.5 |
7.6 |
12.1 |
10.5 |
SKYWORKS SOLUTIONS |
19,451 |
5.0 |
4.5 |
11.4 |
10.2 |
16.7 |
14.6 |
Opto-electronics |
|||||||
II-VI |
2,393 |
2.6 |
2.4 |
- |
- |
28.4 |
23.4 |
EMCORE |
294 |
1.8 |
1.7 |
12.5 |
10.9 |
20.2 |
17.3 |
Mean |
4.0 |
3.5 |
14.3 |
11.1 |
26.4 |
19.0 |
|
IQE |
£714m |
5.2 |
4.7 |
21.2 |
19.0 |
32.0 |
29.2 |
Source: Edison Investment Research. Note: Prices at 20 July 2017. EV calculated on historic debt.
IQE’s share price has doubled since the interims in March as investors have speculated on the potential impact of higher volume VCSEL programmes on earnings. As a result, the shares seem to already price in some further upgrades. Based on our updated forecasts, IQE currently trades at a 2018e P/E of 29x compared to a sector average of 19x. We note that SOITEC, which is currently trading on multiples that are at the upper end of our sample, reported a 22% year-on-year increase in revenues (constant currency) for the quarter ended June 2017. This was partly attributable to strong growth in wafers for digital mobile and low power applications including those used in consumer products that are already on the market such as connected watches, personal digital assistants and driver assistance systems. This suggests that IQE’s multiples may be justified if it too is able to achieve stronger revenue and earnings growth than is presented in our estimates, which is feasible given the additional capacity coming on line in H218. The accelerated earnings growth would result in a reduction in EV/EBITDA and P/E multiples. We intend to present a detailed scenario analysis examining the potential impact of a range of different rates of volume ramp up on IQE’s earnings in our September note commenting on the interim results.
Exhibit 3: Financial summary
£'000s |
2015 |
2016 |
2017e |
2018e |
|
Year End 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
|
PROFIT & LOSS |
|||||
Revenue |
|
114,024 |
132,707 |
145,346 |
160,303 |
Cost of Sales (Inc D&A + SBP) |
(81,585) |
(96,292) |
(105,303) |
(115,664) |
|
Gross Profit |
32,439 |
36,415 |
40,043 |
44,639 |
|
EBITDA |
|
29,001 |
31,730 |
35,462 |
39,665 |
Depreciation and Amortisation |
(10,024) |
(9,611) |
(10,000) |
(12,300) |
|
Operating Profit (before amort. and except.) |
18,977 |
22,119 |
25,462 |
27,365 |
|
Acquired Intangible Amortisation |
(1,208) |
(1,327) |
(1,327) |
(1,327) |
|
Exceptionals |
5,398 |
1,915 |
0 |
0 |
|
Share based payments |
(2,001) |
(2,042) |
(3,000) |
(3,000) |
|
Operating Profit |
21,166 |
20,665 |
21,135 |
23,038 |
|
Underlying interest |
(1,403) |
(1,489) |
(2,000) |
(1,500) |
|
Exceptionals |
(387) |
(144) |
0 |
0 |
|
Profit Before Tax (norm) |
|
17,574 |
20,630 |
23,462 |
25,865 |
Profit Before Tax (FRS 3) |
|
19,376 |
19,032 |
19,135 |
21,538 |
Tax |
773 |
408 |
500 |
500 |
|
Profit After Tax (norm) |
18,066 |
21,440 |
23,462 |
25,865 |
|
Profit After Tax (FRS 3) |
20,149 |
19,440 |
19,635 |
22,038 |
|
Average Number of Shares Outstanding (m) |
662.6 |
671.5 |
680.0 |
683.0 |
|
EPS - normalised (p) |
|
2.60 |
3.00 |
3.27 |
3.58 |
EPS - (IFRS) (p) |
|
3.00 |
2.87 |
2.89 |
3.23 |
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
|
BALANCE SHEET |
|||||
Fixed Assets |
|
174,207 |
215,154 |
234,827 |
233,200 |
Intangible Assets |
86,843 |
103,972 |
109,645 |
111,018 |
|
Tangible Assets |
65,154 |
85,001 |
99,001 |
96,001 |
|
Other |
22,210 |
26,181 |
26,181 |
26,181 |
|
Current Assets |
|
48,909 |
64,323 |
68,506 |
95,557 |
Stocks |
21,215 |
28,498 |
34,213 |
38,755 |
|
Debtors |
23,050 |
30,868 |
34,278 |
39,163 |
|
Cash |
4,644 |
4,957 |
14 |
17,639 |
|
Other |
0 |
0 |
0 |
0 |
|
Current Liabilities |
|
(48,050) |
(46,012) |
(48,572) |
(50,297) |
Creditors |
(44,809) |
(38,360) |
(40,920) |
(42,645) |
|
Short term borrowings |
(3,241) |
(7,652) |
(7,652) |
(7,652) |
|
Long Term Liabilities |
|
(28,032) |
(39,021) |
(39,021) |
(39,021) |
Long term borrowings |
(24,626) |
(36,854) |
(36,854) |
(36,854) |
|
Other long term liabilities |
(3,406) |
(2,167) |
(2,167) |
(2,167) |
|
Net Assets |
|
147,034 |
194,444 |
215,740 |
239,439 |
CASH FLOW |
|||||
Operating Cash Flow |
|
20,971 |
22,463 |
28,896 |
31,963 |
Net Interest |
(1,403) |
(1,489) |
(2,000) |
(1,500) |
|
Tax |
(459) |
(839) |
(839) |
(839) |
|
Capex |
(10,002) |
(19,060) |
(31,000) |
(12,000) |
|
Acquisitions/disposals |
0 |
(11,250) |
0 |
0 |
|
Financing |
544 |
578 |
0 |
0 |
|
Dividends |
0 |
0 |
0 |
0 |
|
Net Cash Flow |
9,651 |
(9,597) |
(4,943) |
17,624 |
|
Opening net debt/(cash) |
|
31,251 |
23,223 |
39,549 |
44,492 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
|
Other |
(1,623) |
(6,729) |
0 |
0 |
|
Closing net debt/(cash) |
|
23,223 |
39,549 |
44,492 |
26,867 |
Source: Edison Investment Research
|
|
Research: Investment Companies
The Scottish Investment Trust (SCIN) invests globally, with the aim of achieving capital appreciation and above-inflation dividend growth. A self-managed trust with a 130-year history, SCIN follows a contrarian investment style, with a high conviction portfolio of 50-100 stocks drawn from three categories: ‘ugly ducklings’, ‘change is afoot’ and ‘more to come’. The four-strong management team, led by Alasdair McKinnon, uses behavioural finance techniques to exploit the tendency of investors to ‘follow the crowd’. By focusing on stocks that are very unloved, those with operational improvements that have been overlooked, and more popular stocks that can continue to do better, they build in a margin of safety. There is an active discount management programme and the trust has recently announced a move to quarterly dividends from FY18.
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