1X2 Stockopedia Small Cap Value report22 Nov 2019 22:43
IQE (LON:IQE)
Share price: 53p (-19.5%)
No. of shares: 793 million
Market cap: £420 million
Trading update
Cardiff, UK 18 November 2019: IQE plc (AIM: IQE) the leading supplier of advanced wafer products and material solutions to the semiconductor industry, announces the following trading update for the full year ended 31 December 2019.
There have been high hopes about this one for a long time, but anyone who bought into it since mid-2017 is unlikely to have done well (so far). This year, it has been an unlucky victim of the events surrounding Huawei's relationship with the US.
In June, the company announced a sales miss for 2019. Revenue would fall somewhere within the wide range of £140 - £160 million (versus previous consensus forecast of £175 million).
Today, we learn that it is struggling to meet even these reduced expectations. Revenue will fall somewhere between £136 - £142 million.
Visibility sounds poor. There are only six weeks left in FY 2019 (slightly over 10% of the year), and yet the company still needs a >4% margin on its full-year revenue forecast. Could we not expect a tighter forecast than that, at this very late stage? Does it not already know what orders it will be working on in December?
The company says there is a forex tailwind of £3 million, and this is included in the new guidance.
So without that tailwind, I presume it's fair to say that revenue guidance would be £133 million - £139 million? And that would fall fully outside of the previous range.
So revenue is down compared to 2017 and 2018, despite all the heavy investment that has taken place. Today's RNS refers to "general diseconomies of scale associated with operating at low volume in some sites", and forecasts an operating loss for the current year.
My view on IQE has been consistent, I think: while I would never claim to be an expert in its technology, I've always thought that its financial performance looked very ordinary.
I said in May: "why would you want to buy a capital-intensive manufacturer from Apple's supply chain at a multiple of 26x, when you can buy Apple itself at 14.5x?". In June, when the share price dropped as low as 44p, I said that it made a more interesting candidate for a short sale, rather than a long idea.
Operations
Photonics - "consistently strong" volumes with the Company's largest customer, "underlining IQE's lead position for epi-wafers in this supply chain".
Wireless - "continued low volumes of orders and reductions in inventory by our major RF chip customers in the US".
Capex - I've noted previously that the company was headed for a net debt position. Fortunately, its debt facility has been increased to £57 million. Net debt is forecast to end the year at up to £20 million, as capex plans are reduced.
Outlook
The outlook for 2020 includes a seasonally weak Q1 and continued supply chain transitions in the wireless market. Beyond Q1 2020, IQE is cautiously optimistic about a return to grow
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