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Last close As at 25/03/2023
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▲ 3.95 (13.55%)
Market capitalisation
266m
Research: TMT
IQE has announced that year-on-year growth in the volumes of GaAs epiwafers was lower in Q421 than it had expected. We believe this relates to supply chain issues in the smartphone industry, which are likely to be resolved during FY22, rather than consumer demand for handsets. We have changed our estimates in line with revised management guidance, cutting FY21 PBT from a £0.1m profit to a £9.2m loss, and our FY22 PBT estimate from a £7.3m profit to a £4.7m loss.
IQE |
Supply chain issues affecting smartphones |
Trading update |
Tech hardware & equipment |
26 November 2021 |
Share price performance
Business description
Next events
Analysts
IQE is a research client of Edison Investment Research Limited |
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IQE has announced that year-on-year growth in the volumes of GaAs epiwafers was lower in Q421 than it had expected. We believe this relates to supply chain issues in the smartphone industry, which are likely to be resolved during FY22, rather than consumer demand for handsets. We have changed our estimates in line with revised management guidance, cutting FY21 PBT from a £0.1m profit to a £9.2m loss, and our FY22 PBT estimate from a £7.3m profit to a £4.7m loss.
Year end |
Revenue (£m) |
EBITDA |
PBT* |
EPS* |
DPS |
P/E |
12/19 |
140.0 |
16.2 |
(7.0) |
(2.46) |
0.00 |
N/A |
12/20 |
178.0 |
29.9 |
3.2 |
0.29 |
0.00 |
131.0 |
12/21e |
152.0 |
18.1 |
(9.2) |
(0.96) |
0.00 |
N/A |
12/22e |
167.3 |
24.5 |
(4.2) |
(0.46) |
0.00 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Performance already affected by currency headwinds
IQE’s news regarding weakness in the global smartphone market echoes recent comments from the companies we believe are IQE’s major wireless customers and market analysts IDC. Manufacturers cannot obtain all the components they need to build sufficient smartphones to meet consumer demand, so their output is lower than they had anticipated, resulting in lower demand for both the wireless epiwafers IQE makes and its vertical cavity surface emitting lasers (VCSEL) photonics device epiwafers. In addition, Q421 sales of other photonics epitaxy will be lower than management expectations because of the rephasing of some defence and security orders and a slow introduction of epitaxy for making distributed feedback lasers for data communications networks. These challenges add to the issues noted in September, ie delays in 5G infrastructure roll-out, which mean that any recovery in demand for GaN epitaxy for 5G infrastructure applications will not happen until FY22, as well as the adverse impact of currency headwinds.
Retaining market share and reducing market risk
IQE continues to invest in a broad range of compound semiconductor technologies. This investment is enabling the group to maintain its share in the wireless epitaxy and VCSEL markets, so it is positioned for growth as the handset and 5G infrastructure markets recover. This investment also enables IQE to supply epitaxy for emerging applications such as longer wavelength VCSELs for autonomous vehicles and lower-cost infrared sensors for health and environmental monitoring, reducing the group’s dependence on 5G adoption.
Valuation: Dependent on smartphone recovery
IQE’s share price has fallen by more than 25% since the 24 November trading update. At current levels, it is trading at a discount to the mean EV/EBITDA multiples of the sample of companies engaged in manufacturing VCSEL epitaxy. However, we believe share price recovery will require greater visibility of a recovery in the smartphone market and the timing of 5G infrastructure roll-out.
Changes to estimates
Management has provided revised guidance for FY21 with full year reported revenues of c £152m generating c £18m EBITDA. This is equivalent to c £164m revenues and c £25m adjusted EBITDA in constant currency, representing an 8% year-on-year decline in group revenues (constant currency) and an EBITDA margin of 15% on a constant currency basis (17% in FY20). In September, management had predicted that group revenues and adjusted EBITDA would be similar to FY20 on a constant currency basis. Management has also changed its guidance on FY21 capital expenditure from £20–30m to £14–17m as the payments for some tool purchases will now be made in FY22 rather than FY21. Management expects net debt to be less than £10m at end FY21.
Exhibit 1: Revisions to estimates
FY20 |
FY21e |
FY22e |
|||||
£m |
Actual |
Old |
New |
% change |
Old |
New |
% change |
Revenue |
178.0 |
169.5 |
152.0 |
-10.3% |
182.4 |
167.3 |
-8.3% |
EBITDA |
29.9 |
27.4 |
18.1 |
-34.0% |
39.5 |
24.5 |
-37.8% |
Adjusted PBT |
3.2 |
0.1 |
(9.2) |
N/M |
7.3 |
(4.2) |
N/M |
Adjusted EPS (p) |
0.29 |
(0.04) |
(0.96) |
N/M |
0.68 |
(0.46) |
N/M |
Capitalised R&D |
5.4 |
8.0 |
5.0 |
-37.5% |
6.0 |
5.5 |
-8.3% |
PPE |
5.0 |
25.0 |
16.0 |
-36.0% |
10.0 |
20.0 |
100.0% |
Net (cash)/debt excluding finance leases at year end |
(1.9) |
11.5 |
9.6 |
-17.1% |
(3.7) |
13.8 |
N/M |
Source: Edison Investment Research
We have revised our FY21 estimates downwards in line with this guidance. We have also adjusted our FY22 estimates, giving 10% year-on-year revenue growth overall, but with faster growth in wireless than photonics. We have increased the investment in tangible assets during FY22 to reflect the shift of some payments for tools from FY21 into FY22.
Smartphone market insights
While market analysts International Data Corporation (IDC) reported global handset shipment growth of 19% year-on-year during H121 and a 12% increase compared with H119, this double-digit growth came to an end in Q321. In late October, IDC noted that supply chain and component shortage issues had resulted in a 6.7% decline year-on-year during Q321. IDC further commented that all major vendors' Q421 production targets had been adjusted downwards and, given continued strong demand for handsets, did not anticipate that the supply-side issues would ease until well into 2022. Both of the companies we believe are IQE’s major wireless customers are being negatively affected in the short term by supply chain shortages. Skyworks’ guidance for the quarter ending December 2021 is for revenues of US$1.475–1.525bn compared with US$1.510bn during the corresponding quarter in the prior year. Qorvo expects revenues in the quarter ending December 2021 to decrease sequentially, citing supply challenges and other factors affecting global smartphone demand. It expects these challenges to moderate in the quarter ending March 2022.
Management changes
In November 2020, Dr Drew Nelson, IQE’s founder and CEO, announced his intention to step aside from his current role once a successor had been found. A successor, Americo Lemos, has recently been appointed and will become CEO in January. Mr Lemos is currently on the executive team of the semiconductor designer and manufacture GlobalFoundries, where he is senior vice president of business development for Asia Pacific and China country president, responsible for growing business in these markets. Previous roles include senior VP Qualcomm Datacenter Technologies, VP Platform Engineering Group at Intel, VP Mobile Design Organisation at Flextronics and director of 3G Programs at Texas Instruments. We believe that his priority on joining IQE will be aligning the group’s technology roadmap to market opportunities, thus improving return on the investment in IP and capital equipment for investors.
Dr Nelson has stepped down as CEO and become a non-executive board member with the title of president, acting in an advisory and ambassadorial role for the business. He will also devote more of his time to the further development of the Compound Semiconductor Cluster in South Wales. Chairman Phil Smith has temporarily moved from a non-executive to an executive role until Mr Lemos takes up his appointment.
Valuation: Share price recovery dependent on 5G handset and infrastructure markets
Exhibit 2: Peer valuation
Company |
Market |
EV/Sales 1FY (x) |
EV/Sales 2FY (x) |
EV/EBITDA 1FY (x) |
EV/EBITDA 2FY (x) |
P/E 1FY |
P/E 2FY |
Epitaxy |
|||||||
LandMark Optoelectronics |
646 |
8.5 |
6.9 |
16.5 |
13.0 |
39.4 |
28.5 |
Soitec |
8,885 |
9.6 |
7.7 |
29.6 |
23.3 |
54.0 |
43.3 |
Visual Photonics Epitaxy |
971 |
7.3 |
6.4 |
18.8 |
16.7 |
29.8 |
24.7 |
WIN Semiconductors |
5,355 |
6.3 |
5.5 |
15.4 |
12.4 |
27.8 |
21.6 |
Opto-electronics |
|||||||
II-VI |
6,832 |
2.4 |
2.1 |
9.2 |
8.3 |
17.8 |
14.6 |
EMCORE |
292 |
1.4 |
1.3 |
7.7 |
6.5 |
11.5 |
10.1 |
Lumentum Holdings |
6,450 |
3.3 |
3.0 |
9.3 |
8.7 |
14.6 |
13.4 |
Mean - Epitaxy and Opto-electronics |
5.5 |
4.7 |
15.2 |
12.7 |
27.8 |
22.3 |
|
LandMark Optoelectronics |
646 |
8.5 |
6.9 |
16.5 |
13.0 |
39.4 |
28.5 |
Visual Photonics Epitaxy |
971 |
7.3 |
6.4 |
18.8 |
16.7 |
29.8 |
24.7 |
Mean – VCSELs |
7.9 |
6.7 |
17.7 |
14.8 |
34.6 |
26.6 |
|
IQE |
$407m |
2.0 |
1.8 |
16.8 |
12.3 |
(39.5) |
(83.2) |
Source: Refinitiv, Edison Investment Research. Note: Prices at 25 November 2021
We include a comparative valuation of IQE versus its broader (but imperfect) peer group above. At current levels, IQE is trading at a discount on an EV/sales and EV/EBITDA basis with regards to the sample of companies engaged in manufacturing VCSEL epitaxy. IQE has a broader product portfolio than its VCSEL peers. In addition, it can manufacture in multiple geographies, which gives it relative resilience to US-China trade disputes. For these reasons, we believe it is not reasonable for IQE to trade on EV/EBITDA multiples that are at a discount to the VCSEL sample. However, we believe share price recovery will require greater visibility of the timing of the recovery in the smartphone market and of 5G infrastructure roll-out as these factors will determine the level of demand for wireless and VCSEL epitaxy in FY22.
Exhibit 2: Financial summary
£'000s |
2019 |
2020 |
2021e |
2022e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
140,015 |
178,016 |
151,975 |
167,258 |
Adjusted Cost of Sales |
(119,145) |
(144,689) |
(135,244) |
(146,627) |
||
Adjusted Gross Profit |
20,870 |
33,327 |
16,731 |
20,631 |
||
EBITDA |
|
|
16,246 |
29,919 |
18,074 |
24,537 |
Depreciation and Amortisation |
(22,289) |
(24,533) |
(25,500) |
(26,500) |
||
Operating Profit (before amort. and except.) |
|
|
(4,676) |
5,386 |
(7,426) |
(1,963) |
Acquired Intangible Amortisation |
0 |
0 |
0 |
0 |
||
Exceptionals |
(14,897) |
(10,638) |
0 |
(2,500) |
||
Share based payments |
771 |
(265) |
(1,500) |
(1,500) |
||
Operating Profit |
(18,802) |
(5,517) |
(8,926) |
(5,963) |
||
Underlying interest |
(1,606) |
(2,165) |
(1,800) |
(2,200) |
||
Exceptionals and losses from JVs |
(4,540) |
3,788 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
(7,019) |
3,221 |
(9,226) |
(4,163) |
Profit Before Tax (FRS 3) |
|
|
(24,948) |
(3,894) |
(10,726) |
(8,163) |
Reported tax |
(10,180) |
1,001 |
1,753 |
791 |
||
Profit After Tax (norm) |
(19,010) |
2,702 |
(7,473) |
(3,372) |
||
Profit After Tax (FRS 3) |
(35,128) |
(2,893) |
(8,973) |
(7,372) |
||
Average Number of Shares Outstanding (m) |
787.2 |
797.2 |
801.6 |
802.4 |
||
EPS - normalised (p) |
|
|
(2.46) |
0.29 |
(0.96) |
(0.46) |
EPS - (IFRS) (p) |
|
|
(4.51) |
(0.41) |
(1.16) |
(0.96) |
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
||
Gross Margin (%) |
14.9 |
18.7 |
11.0 |
12.3 |
||
EBITDA Margin (%) |
11.6 |
16.8 |
11.9 |
14.7 |
||
Operating Margin (before GW and except.) (%) |
-3.3 |
3.0 |
-4.9 |
-1.2 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
300,047 |
277,161 |
272,661 |
271,661 |
Intangible Assets |
118,456 |
105,772 |
103,272 |
101,272 |
||
Tangible Assets |
136,557 |
126,229 |
124,229 |
125,229 |
||
Other |
45,034 |
45,160 |
45,160 |
45,160 |
||
Current Assets |
|
|
72,533 |
94,125 |
77,922 |
76,807 |
Stocks |
30,668 |
30,887 |
30,603 |
31,619 |
||
Debtors |
33,065 |
38,575 |
34,142 |
36,201 |
||
Cash |
8,800 |
24,663 |
13,177 |
8,987 |
||
Other |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(32,646) |
(48,545) |
(40,243) |
(43,591) |
Creditors |
(27,529) |
(37,546) |
(29,244) |
(32,592) |
||
Short term borrowings (including lease liabilities) |
(5,117) |
(10,999) |
(10,999) |
(10,999) |
||
Long Term Liabilities |
|
|
(69,491) |
(62,306) |
(57,306) |
(57,306) |
Long term borrowings (including lease liabilities) |
(67,631) |
(58,765) |
(53,765) |
(53,765) |
||
Other long-term liabilities |
(1,860) |
(3,541) |
(3,541) |
(3,541) |
||
Net Assets |
|
|
270,443 |
260,435 |
253,034 |
247,571 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
8,948 |
35,457 |
16,314 |
23,510 |
Net Interest |
(671) |
(1,142) |
(1,800) |
(2,200) |
||
Tax |
(151) |
(993) |
0 |
0 |
||
Capital expenditure and capitalised R&D |
(41,834) |
(10,402) |
(21,000) |
(25,500) |
||
Acquisitions/disposals |
10 |
(1,363) |
0 |
0 |
||
Financing |
712 |
240 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
(32,986) |
21,797 |
(6,486) |
(4,190) |
||
Opening net debt/(cash) including lease liabilities |
|
(20,807) |
63,948 |
45,101 |
51,587 |
|
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
(51,769) |
(2,950) |
0 |
0 |
||
Closing net debt/(cash) including lease liabilities |
|
63,948 |
45,101 |
51,587 |
55,777 |
|
Closing net debt/(cash) excluding finance leases |
|
15,970 |
(1,923) |
9,563 |
13,753 |
|
|
Source: Company accounts, Edison Investment Research |
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|
|
Research: Industrials
Ongoing strong demand remains encouraging for Accsys and investment to support future growth is also an indicator of confidence in the outlook, in our view. The broader strategic plan – including well-flagged and material capacity expansion – is intact and our earnings expectations are materially as before. Accsys is at a key business development stage and poised to enter a significant earnings growth phase.
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