Around 20% of forecast earnings at risk in analysts worst case scenario calculations
Thursday 30 May 2019 Author: Steven Frazer

Compound semiconductor technology designer IQE (IQE:AIM) has become the first UK-listed business to confirm that its revenue is at risk from the US government ban on Chinese firm Huawei.

The Cardiff-based company said on Friday 24 May that up to 5% of its 2019 revenue could be on the line as supply chain disruption ripples out across the microchips industry. IQE is forecast to make around £174m of sales this year to 31 December.

Confirmation appeared to initially reassure investors in the company, with IQE shares apparently stabilising after hefty selling through most of May. The stock has declined from 95.15p on 3 May to 72.65p, a near 20% fall.

Yet some analysts believe the impact to earnings could be significantly worse because of operational gearing in IQE’s business. The company has substantial fixed costs which cannot be easily lowered in the event of weak revenues.

‘We believe this would translate into an up to 20% potential earnings per share (EPS) downgrade for 2019’, says Canaccord Genuity. The broker currently anticipates 2019 EPS of 2p, marginally below the 2.1p expectation of the Reuters drawn consensus.

A worst case 20% cut to EPS would send the equivalent price to earnings multiple from 36.3 to more than 45.

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