IQE Acquires Kopin Wireless: Strategically Compelling Move

IQE’s acquisition of Kopin Wireless looks strategically compelling, extending IQE’s market share in wireless to 50-60% and giving the company near blanket coverage of the major RF chip suppliers as well as a strong position across both power amplifiers and switches. The deal is EPS neutral to our 2013 forecast, which has scope for upside, and with the release of cost synergies over 2014 and 2015, further strong earnings growth should follow.

Acquiring one of its main competitors
Kopin Wireless (a subsidiary of NASDAQ-listed, Kopin Inc) is the number three epitaxial wafer supplier (after IQE and VPEC). The jewel in the crown for IQE is the company’s relationship with Skyworks, the leading RF chip supplier globally, which accounted for 73% of Kopin Wireless’s revenue in FY11. Thus the deal significantly reduces customer risk through giving IQE near blanket coverage of the major RF chip suppliers. The company also significantly strengthens its HBT RF switches position to complement its legacy strength in producing wafers for pHEMT RF power amps and gains a footprint in the Taiwanese semiconductor manufacturing/design hub.

Earnings enhancing
Cautiously assuming a 12% decline in Kopin Wireless’s sales in 2013 due to loss of RFMD share to IQE, we estimate that the deal will be earnings neutral this year. Our estimates for 2014 are new, with 32% earnings growth assisted by the impact of £7m of annualised cost synergies from H214 onwards. The full-year impact from these cost savings should drive a further 10%+ earnings growth in 2015 (not yet forecast). We expect net debt of £33m at year-end 2013, which equates to 1.2x 2013 EBITDA.

2012 earnings in line, higher RFMD wafer discount
The statement also indicated that FY12 sales would be £87-88m, a touch below our £90.2m estimate, but that EBITDA of £16-17m would be in line (Edison £16.5m). Year-end net debt of £15.5m is higher than our £13.4m estimate, reflecting higher than anticipated wafer discount payments to RFMD as it took market share at the expense of TriQuint.

Valuation: Premium rating warranted
IQE now trades at 17.4x 2013 earnings falling to 13.1x in 2014 and this rating should fall by at least 10% in 2015 as the full year of synergies takes effect. The rating is a premium to the majority of its peers on near-term multiples, but we feel that a premium is warranted, given the clear path for continued earnings growth, scope for upgrades and reduced customer exposure.

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