Results in line, diversification continues
Results were in line with our updated forecasts and management remains confident that prospects in wireless remain solid while the diversification of the business into other verticals continues. The acquisition of Solar Junction (SJC) by a ‘strategic investor’ suggests the move to commercial volume shipment is drawing closer, although the potential leverage gained will only become clearer when the investor is disclosed. With £7m of synergies to come through in full in 2015, the shares trade on undemanding multiples on estimates that could be conservative.
Operating cost synergies result in 60% EBIT growth
Full year results were in line with the January trading update and our estimates. H2 operating profit was 60% up sequentially despite only a 1.2% increase in revenues as a result of cost synergies. Photonics and Electronics segments were the main source of constant currency growth, up 12% and 10% h-o-h respectively with wireless growth of 3%; being held back by the slowdown in smartphone sales and the associated inventory correction. Excluding Kopin, revenue was up 8.1% (including RFMD) to £95.9m. Net debt, at £34.4m (Edison £34.8m) reduced from £37.7m at H1 13 end.
Potential inflection point in Photonics
VCSELs are expected to be a growth application in 2014 as more customers, many of which were previously vertically integrated, bring International Quantum Epitaxy (IQE.LSE) based products to market across a range of application areas. CPV solar offers more significant growth potential, possibly starting towards the end of this year. The acquisition of SJC by a strategic investor may help accelerate progress, although the extent of leverage will only become clear when the investor is disclosed. Beyond this, GaN on Silicon for power switching and potential LED applications offer significant potential. The announcement that IQE has delivered its first 200mm GaN on Silicon wafer to Singapore-MIT for the development of next generation CMOS gives an indication of the breadth of IQE’s developments in high volume applications beyond wireless.
Valuation: 8.7x FY15 P/E vs 16.1x peer average
IQE is trading at a 8.7x FY15 P/E, is a +20% discount to its cheapest wireless RF peer and looks undemanding, even after compensating for its14% two-year EPS CAGR vs peer average of 20%. We see the diversification of revenues, particularly through growth in the high volume CPV Solar and GaN markets CPV solar as being the key catalyst for upside. Completion of the inventory correction in wireless disclosure of the strategic investor in SJC could be shorter-term catalysts.
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