Imagination Technologies impresses Investec with margin guidance

Imagination Technologies' shares surged on Tuesday after the chip company beat forecasts with its first-half results and impressed with its outlook, prompting positive comments from Investec.The broker said that the interim figures were slightly ahead of its expectations with group revenues down just 3.5% at £82.2m, compared with its £78.8m estimate. Adjusted earnings before interest and tax (EBIT) dropped by 59.7% to £5m, but came in ahead of the £3m forecast.Investec said that the 'beat' was due to a better-than-expected royalty revenue performance, with sales holding more or less flat year-on-year at £56.3m."A key positive is the (broad) stabilisation of non-MIPS [royalty] units at 248m (250m [in second half ended 30 April]) after several halves of decline," said analysts Roger Phillips and Julian Yates.Imagination gave new guidance for flat non-MIPS royalty units for the full year, implying around 280m units in the second half compared with current consensus of at least 330m. However, the analysts said this cleared up uncertainty and addressed a key issue for the market.Nevertheless, they said the "major news" in the statement was the medium-term target for EBIT margins of 30-40% - it was the first time the company has given explicit guidance for this."In theory this could at least double EBIT [for the financial year ending 2017], and so this stock apparently has a bottom-line return story for what feels like the first time," Phillips and Yate said."We retain our 'hold' given testing royalty rate assumptions for the second half, but expect a positive short-term reaction."They put their 220p target price under review for the stock, which had jumped 12.6% to 214p by 11:33.