IQE PLC (LON: IQE)

IQE PLC is the FTSE AIM UK 50 listed Company, which is engaged in the research and development of engineering consultancy services to the semiconductor industry. The Company has nine manufacturing facilities present in the US, Taiwan, Singapore, and the UK. IQE is headquartered in Cardiff, UK. IQE provides wafer services and advanced wafer products to the semiconductor industry.

On 29 March 2022, the Company will release FY21 financial results for the year ended 31 December 2021. 

Growth Prospects

• Improvement in Demand Levels: The 5G penetration of the smartphone handset market and WiFi 6 had resulted in an increased demand for Wireless GaAs epi-wafers during H2 FY21.
• Consolidation Strategy: The closure of the Group’s Pennsylvania facility will improve production efficiency and margins in the medium to long term. Moreover, the closure of the Singapore facility remained on track and is due to be completed by mid-2022.
• Impressive Collaborations: The Company has recently announced a partnership with Critical Manufacturing and entered into a multi-year strategic IT transformation agreement. With this, the Company aimed to efficiently scale the manufacturing capabilities and provide state-of-the-art support to the operations teams.

Key Risks 

• Decline in Top-Line Business: The Company had anticipated an 8% year-on-year decline in top-line revenue on a constant currency basis.
• Lower-than-Expected Growth: The continued weakness in the roll out of 5G infrastructure has dented the growth prospect to a certain extent.
• Correction in Stock Price: The stock price plunged by approximately 49% on a one-year basis.
• Inflation Concern: Due to the inflationary pressure, the Bank of England increased the Bank Rate by 25 basis points to 0.50%. It can keep the equity market under pressure amid the rising US Dollar index.

Key Fundamental and Shareholders Statistics of IQE PLC.

Invesco Advisers, Inc.  is the most significant shareholder as it holds nearly 142.48 million shares as of 31 December 2021.             

H1 FY21 Financial Highlights (for the six months ended 30 June 2021, as on 07 September 2021)

 (Source: Company Filings)

• Decent Top-Line Business: The Company posted revenue of £79.5 million during H1 FY21 as per the guidance provided.
• Operating Loss: The Company had managed to bring down the operating loss from negative £5.00 million during H1 FY20 to a negative £1.90 million during H1 FY21.
• Liquidity: IQUE had maintained strong liquidity illustrated by a net funds position of £0.9 million as of 30 June 2021.
  

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 17 February 2022 at 09:58 AM GMT, IQE’s shares were trading at GBX 40.50, down by around 1.94% against the previous day closing price. Stock 52-week High and Low were GBX 83.50 and GBX 27.53, respectively.

On a daily chart, the MACD line has given a bullish crossover against the signal line. Hence, there could be an uptick in the stock price in the near term. Meanwhile, the 20-days exponential moving average of GBX 35.28 indicates a bullish price momentum. 

Valuation Methodology: Price/Cash Flow Approach (FY21E) (Illustrative)

Business Outlook

The Company expects to show improvements in 2022, underpinned by the 5G infrastructure developments. Meanwhile, IQE would plan to embed US MBE manufacturing activities by 2024 in North Carolina. The Company would continue to witness a positive trend regarding the demand for 3D sensing, advanced sensing applications and communications products. IQE had managed to meet the FY21 revenue guidance provided in the November Trading Update of £164 million at constant currency. Overall, the Company is well-positioned to maintain the leadership position in the 5G megacycle in the coming years.

Considering the solid operational progress, net fund position during H1 FY21, improvement in profitability, undervalued multiples, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on IQE PLC at the current price of GBX 40.50 (as on 17 February 2022 at 09:58 AM GMT), with lower-double digit upside potential based on 7.72x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios. 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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