Reassuringly on track
(LONDON:IQE)’s full year update was reassuring, with key P&L figures expected to be in line and year-end net debt lower than forecast. On unchanged estimates the rating of 9x FY15 earnings looks undemanding. Continued progress to plan should justify a progressive re-rating upwards.
On track for full year; confident for FY15
IQE’s trading update confirmed that FY14 results should meet expectations, with revenues of c.£112m (Edison £112.1m), EBITDA of £27m (Edison £26.8m) and adjusted, fully diluted EPS of 2.4p (Edison 2.2p). Year-end net debt is expected to be £31m, lower than our previous £34.6m estimate. With a £5m restructuring programme now complete and set to generate at least £7m of annualised cost benefits (of which more than £4m came through in FY14), IQE looks well placed to further expand margins and reduce debt over the course of FY15 and beyond.
Wireless stabilisation
Having moderated expectations for wireless growth at the interims, due to a shift in mix to lower-value (but higher-margin) product and lacklustre smartphone growth, the wireless business is showing welcome signs of stability. A renewed supply agreement (worth $50m+ in FY15), where IQE has extended its market share and breadth of products supplied to a key wireless customer, supports this expectation. With 10%+ growth forecast for the major RF chip suppliers, Skyworks and Qorvo, and market analyst Strategy Analytics forecasting c6% growth for the GaAs device market, our forecast of flat wireless revenues for FY15 may be conservative.
Contribution from photonics expected to grow
Revenues from photonics grew by over 20% year-on-year, driven by IQE’s products for VCSEL lasers, which are used across a broad range of applications, and also the company’s infrared products, where IQE is starting to see adoption in consumer as well as military applications. This trend looks set to continue as more of these products are brought to market in FY15, while the initiatives in CPV solar and gallium nitride could start to contribute more meaningfully in FY16.
Valuation: Execution to plan should further rally
Our estimates for FY15 are essentially unchanged. Despite the recent rally, IQE’s FY15 P/E rating of 9.0x remains at a significant discount to its RF chip peers (mid-teens), and we believe these estimates are well underpinned. Continued execution to plan should justify a continued re-rating upwards.
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