Canaccord Genuity downgrades IQE to 'hold'

(Sharecast News) - Analysts at Canaccord Genuity lowered their rating on semiconductors outfit IQE from 'speculative buy' to 'hold' on Friday, citing what it called a "gross margin conundrum".
Canaccord said on Friday that ahead of IQE's 2020 full-year results it was bracing itself for some growth moderation on the back of difficult 2020 comparatives, up 28% year-on-year, and pointed to a 7-8% currency headwind. However, the analysts said yesterday's guidance for broadly flat constant currency sales and underlying earnings in the first half implied reported sales were down mid-single digits, marking the first downgrade to its expectations since last year's upgrade cycle.

The Canadian bank highlighted that despite record sales in 2020, IQE delivered only a modest 3% adjusted operating margin, which it pinned on the firm's relatively low gross margin of around 19%, compared to peer margins ranging between 25% and 50%, making the muted leverage "a bit of a conundrum".

While Canaccord said IQE remains "structurally well placed" to benefit from two technology mega-trends - growing adoption of 5G as well as 3D sensing in smartphones.

However, for the mid-term, Canaccord's expectation of a combination of muted growth, lack of upside risk to sales and earnings per share forecasts, as well as continued low profitability and free cash generation, made it move to the sidelines and lower its target price on the stock to 65.0p from 80.0p.