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Last close As at 02/06/2023
-33.10
▲ 3.95 (13.55%)
Market capitalisation
266m
Research: TMT
IQE’s pre-close trading update noted that management expects FY17 revenues to be ahead of market expectations. Noting that the upgrade is driven by delivery of volume epitaxy on a programme that we infer is the new iPhone X, a programme which will continue throughout FY18, we raise our revenue estimates for both FY17 and FY18, but keep EPS numbers unchanged as the proportion of licence revenues in the mix is lower.
IQE |
VCSEL growth underpins revenue upgrade |
Pre-close trading update |
Tech hardware & equipment |
2 January 2018 |
Share price performance
Business description
Next events
Analysts
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IQE’s pre-close trading update noted that management expects FY17 revenues to be ahead of market expectations. Noting that the upgrade is driven by delivery of volume epitaxy on a programme that we infer is the new iPhone X, a programme which will continue throughout FY18, we raise our revenue estimates for both FY17 and FY18, but keep EPS numbers unchanged as the proportion of licence revenues in the mix is lower.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/15 |
114.0 |
17.6 |
2.60 |
0.0 |
52.7 |
N/A |
12/16 |
132.7 |
20.6 |
3.00 |
0.0 |
45.7 |
N/A |
12/17e |
150.1 |
23.7 |
3.26 |
0.0 |
42.0 |
N/A |
12/18e |
165.2 |
28.3 |
3.56 |
0.0 |
38.5 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Photonics revenues double, while wireless stable
Management expects volume VCSEL ramp-up during H217 to result in photonics revenues approximately doubling for FY17 as a whole. Our estimates model photonics revenues remaining at H217 levels throughout FY18. Management expects wireless revenues to be broadly flat year-on-year, with favourable FX rates balancing an inventory reduction. Our estimates model growth from this segment in FY18. IQE expects the increase in wafer sales to drive an expansion of wafer margins in FY17, an effect which we model as continuing through FY18. We revise our group revenue estimates from £145.3m to £150.1m for FY17 and from £160.3m to £165.2m for FY18. We also increase the FY17 cash tax payment by £4.2m to reflect settlement of a prior year tax liability.
Potential for multiple VSCEL ramp-ups
Our revised estimates model growth from multiple volume VCSEL programmes related to the iPhone X. IQE is currently working on a range of other VCSEL programmes that have potential to become volume contracts in the future. We believe that some are for other phone manufacturers wanting to include Face ID functionality in their devices. Some are for other consumer applications including hand and body tracking, automotive applications, data comms and industrial applications, indium phosphide wafers for high-speed data networks and gallium nitride wafers for radio frequency and power applications. The acquisition of Quasi Photonic Crystal patents for $0.5m will help IQE maintain its technology leadership in these applications and could lead to new growth markets beyond epitaxy.
Valuation: Earnings upgrades priced in
The shares have performed extremely well in recent months, rising more than 3x from 37.75p a year ago, and are now trading on multiples that suggest that upgrades are already priced in. There remains potential for FY18 earnings to exceed current expectations, especially if other VCSEL programmes move into volume manufacture. Our September outlook note explores the impact of potentially faster rates of VCSEL roll-out on FY18 EPS.
Exhibit 1: Financial summary
£'000s |
2015 |
2016 |
2017e |
2018e |
|
Year End 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
|
PROFIT & LOSS |
|||||
Revenue |
|
114,024 |
132,707 |
150,112 |
165,230 |
Cost of Sales (Inc D&A + SBP) |
(81,585) |
(96,292) |
(110,344) |
(120,790) |
|
Gross Profit |
32,439 |
36,415 |
39,769 |
44,440 |
|
EBITDA |
|
29,001 |
31,730 |
35,461 |
40,288 |
Depreciation and Amortisation |
(10,024) |
(9,611) |
(10,000) |
(12,300) |
|
Operating Profit (before amort. and except.) |
18,977 |
22,119 |
25,461 |
27,988 |
|
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 |
21,134 |
23,661 |
|
Underlying interest |
(1,403) |
(1,489) |
(1,725) |
300 |
|
Exceptionals |
(387) |
(144) |
0 |
0 |
|
Profit Before Tax (norm) |
|
17,574 |
20,630 |
23,736 |
28,288 |
Profit Before Tax (FRS 3) |
|
19,376 |
19,032 |
19,409 |
23,961 |
Tax |
773 |
408 |
500 |
500 |
|
Profit After Tax (norm) |
18,066 |
21,440 |
23,736 |
28,288 |
|
Profit After Tax (FRS 3) |
20,149 |
19,440 |
19,909 |
24,461 |
|
Average Number of Shares Outstanding (m) |
662.6 |
671.5 |
689.8 |
755.6 |
|
EPS - normalised (p) |
|
2.60 |
3.00 |
3.26 |
3.56 |
EPS - (IFRS) (p) |
|
3.00 |
2.87 |
2.89 |
3.24 |
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
|
BALANCE SHEET |
|||||
Fixed Assets |
|
174,207 |
215,154 |
238,827 |
260,200 |
Intangible Assets |
86,843 |
103,972 |
113,645 |
116,518 |
|
Tangible Assets |
65,154 |
85,001 |
99,001 |
117,501 |
|
Other |
22,210 |
26,181 |
26,181 |
26,181 |
|
Current Assets |
|
48,909 |
64,323 |
110,186 |
117,001 |
Stocks |
21,215 |
28,498 |
36,521 |
40,472 |
|
Debtors |
23,050 |
30,868 |
36,521 |
40,899 |
|
Cash |
4,644 |
4,957 |
37,145 |
35,630 |
|
Other |
0 |
0 |
0 |
0 |
|
Current Liabilities |
|
(48,050) |
(46,012) |
(42,405) |
(44,472) |
Creditors |
(44,809) |
(38,360) |
(42,405) |
(44,472) |
|
Short term borrowings |
(3,241) |
(7,652) |
0 |
0 |
|
Long Term Liabilities |
|
(28,032) |
(39,021) |
(2,167) |
(2,167) |
Long term borrowings |
(24,626) |
(36,854) |
0 |
0 |
|
Other long term liabilities |
(3,406) |
(2,167) |
(2,167) |
(2,167) |
|
Net Assets |
|
147,034 |
194,444 |
304,441 |
330,562 |
CASH FLOW |
|||||
Operating Cash Flow |
|
20,971 |
22,463 |
25,831 |
34,024 |
Net Interest |
(1,403) |
(1,489) |
(1,725) |
300 |
|
Tax |
(459) |
(839) |
(5,039) |
(839) |
|
Capex |
(10,002) |
(19,060) |
(35,000) |
(35,000) |
|
Acquisitions/disposals |
0 |
(11,250) |
(373) |
0 |
|
Financing |
544 |
578 |
93,000 |
0 |
|
Dividends |
0 |
0 |
0 |
0 |
|
Net Cash Flow |
9,651 |
(9,597) |
76,694 |
(1,515) |
|
Opening net debt/(cash) |
|
31,251 |
23,223 |
39,549 |
(37,145) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
|
Other |
(1,623) |
(6,729) |
0 |
0 |
|
Closing net debt/(cash) |
|
23,223 |
39,549 |
(37,145) |
(35,630) |
Source: Company accounts, Edison Investment Research
|
|
Research: Industrials
In Norcros’s first half, the company delivered improved profitability, made significant organic business investment and completed an earnings enhancing UK acquisition. Merlyn is a highly complementary business and a logical addition to the business portfolio. Taken together, we raised our current year EPS by c 4% and by c 7% and c 9% in the following two years, with dividends nudged up also. The share price has performed well on this newsflow but Norcros still represents good value, in our view.
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