IQE PLC

IQE PLC (IQE) is a Cardiff, United Kingdom-headquartered designer and manufacturer of epiwafer products driving connected 5G technologies and is recognised as the leading global supplier of advanced wafer products and wafer services to the semiconductor industry, with a global footprint spanning Europe, Asia and the USA. The group is engaged in the research, development and provision of engineering consultancy services to the compound semiconductor industry, and the products that the group manufacture are used by major global chip companies to produce the chips which enable a wide range of high-tech applications, catering to a diverse range of markets. The group’s operations are differentiated in four operating segments: Wireless, Photonics, Infra-red and CMOS++. Dr Andrew W Nelson is the President and Chief Executive Officer of the group.

Trading Update
In the trading update for the full year ended 31 December 2019, the company reported that a mid-single-digit adjusted operating loss was now expected due to revenues being slightly below the previous guidance range to between £136 million and £142 million, compared to the previous guidance range of £140 million to £160 million. The net debt position at year end is expected to be between £15 million to £20 million, and capex would be towards the bottom end of the previous guidance of £30-40 million.

Financial Highlights (H1 2019, in £m)
                      
 (Source: Company Filings)

Due to fall in demand from a major InP laser customer, international trade tensions, reductions in demand in the context of a technology market slowdown and a weak smartphone handset market, revenue of £66.7 million (H1 2018: £73.4 million) was 9% down year on year. Due to an increase in depreciation and amortisation of £2.4 million resulting from the investment in capacity and negative operating leverage from a cost base scaled for volume, adjusted operating loss was reported at £1.9 million (H1 2018: profit £7.6 million). Adjusted EBITDA declined to £7.4 million during the period from £13.5 million in the prior year, while reported loss before tax declined to £3.7 million versus a profit before tax of £6.6 million. Due to a one-off non-cash deferred US tax charge and the operating loss, the company reported adjusted diluted loss per share of 1.29p against a profit of 0.76p. Cash generated from operations of £4.0 million (H1 2018: £7.6 million) reduced due to lower trading volumes, and net debt was reported at £0.8 million and capital investments during the period were £19.1 million.

Share Price Commentary

Daily Chart as at 22-November-19, before the market closed (Source: Thomson Reuters)

On 22 November 2019, at the time of writing (before the market closed, GMT 9:13 am), IQE shares were trading at GBX 45.74, up by 0.52% against the previous day’s closing price. Stock's 52 weeks High and Low are GBX 99.84/GBX 41.32. The company's stock beta was 0.60, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was around £362.37 million.

Conclusion
Driven by an expanding Asian market opportunities for both Photonics and Wireless products, demand for GaN to meet accelerating 5G infrastructure deployments, expected content gains in an expanding market for 3D sensing, the company remained optimistic about a return to growth but noted that outlook for year 2020 included a seasonally weak Q1 data. Moreover, it has made significant strategic and operational progress with its global expansion projectsand remained confident about its ability to adapt to global supply chain shifts, coupled with a unique breadth of compound semiconductor materials experience and IP portfolio.
Based on the above rationale, we have given a "HOLD" recommendation at the closing price of GBX 45.50 (as on 21 November 2019).

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