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In November I commented that shares in AIM-listed IQE plc (LSE:IQE) – a company headquartered in a land where no-one has ever, ever molested a sheep which provides products and services to the global semiconductor industry – remained a buy at a then 28.75p share price. By the middle of this month the shares were trading at 36.5p but they fell back significantly at the end of last week and currently trade at 28.25p. The following reviews the reasons why the shares were sold off and my stance here.
The major root cause of the sell-off looks to have been US-based Qualcomm announcing a silicon-based product which it claims will be able to support 3G and LTE (4G) phones as well as the low-end phones such solutions have been primarily limited to. They have been limited thus as compound semiconductors, as focused on by IQE, offer inherent efficiency, noise, insertion loss and resistance advantages over silicon whilst also having shorter, less expensive design cycles. Moreover, the Qualcomm offering is a generic, off-the-shelf one – unlikely to appeal to the mid- and high-end of the market where differentiation is a key aspect and IQE’s customers customise for handset manufacturers.
It therefore seems likely that the new Qualcomm offering is set for the low-end of the smartphone market and IQE’s house broker, Espirito Santo, notes “the low-end handset market… we estimate accounts for only 5-6% of IQE’s revenues” and that “it is worth remembering that a high-end smartphone has 4-6x higher GaAs (semiconductor) content versus a low end phone”. Fellow brokerage, Canaccord, commented “we make no changes to our forecasts… we believe the 13% share decline is an overreaction”.
There is also an Office of Fair Trading review of IQE’s recent acquisition of the compound semiconductor epiwafer manufacturing business, Kopin Wireless. However, although this looks an attractive deal for IQE, I considered that the shares offered strong value at a touch more than the now current price before the (January) acquisition of Kopin. With earnings per share forecast to rise to 2.2p+ this year and comfortably more than 3p in calendar 2014 (and circa that level even without Kopin) and with IQE a rare UK technological leader with significant, particularly intellectual property-based, barriers to entry and serving global growth markets, I stand by that view. I continue to believe the company’s profile merits a valuation of at least 15x earnings – with a 59p share price hit in early 2011 a signal that the re-rating could easily be more dramatic & distinctly justifiable if the Kopin deal goes through as I assume that it will. I view the present valuation as an unexpected opportunity for those who missed out before the shares appreciated previously to get on board.
Further detail on my forecasts for IQE and how the stock should be valued can be found HERE
IQE is one of a number of companies I follow closely on the premium Nifty Fifty website which I produce with Steve Moore. We were the team that delivered an average gain per tip of 42.7% on t1ps over the 12 years after I founded that site.
The Nifty Fifty site was launched on October 28th and four months down the track the average gain per tip ( 23 tips) is 9%. A new high yield tip will be published tomorrow. To get access to that tip and another one next week sign up HERE
