IQE flies under the radar

Rapid growth in Photonics to keep re-rating going
Thursday 01 Dec 2016 Author: Steven Frazer

Compound semiconductor technology company IQE (IQE:AIM) is making faster progress in new markets than analysts had previously anticipated.

This creates the opportunity to reduce its exposure to its biggest wireless end market, worth 69% of half year to 30 June revenue, improve profit margins from higher value Photonics and other technologies, and power the share price to 50p or higher. The stock currently changes hands at 35.75p.

BN IQE 011216

The Cardiff-based £240m company delivered 45% growth in revenue from Photonics – essentially lasers and sensors – during the first half to £10.7m. This was 17% of the £63m total.

Impressive traction is being achieved in smart phone laser focusing and fibre optic internet infrastructure applications. Other exciting breakthroughs are being made in Infrared, mainly in defence applications but increasingly in medical and industrial imaging, LiDAR, effectively a radar system using lasers being tested in self-driving cars, and in the estimated $12bn Power Switching market.

‘As Photonics grows, dependence on volatile Wireless revenues, that are susceptible to inventory corrections and die shrinkage, should reduce and the quality of earnings increase,’ explains Canaccord Genuity analyst Paul Morland in a note to clients following an IQE site visit.

It was an inventory correction that torpedoed underlying second half profits last year.

Ongoing production improvements mean that capacity constraints appear unlikely to be a problem in the short term as demand looks set to soar for Photonics and other applications.

 

At the current 35.75p the stock trades on a multiple of 11.9 times 2017’s anticipated 3p per share of earnings, falling to around 10 in 2018 as earnings are forecast to accelerate.

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