This was in part down to a raft of exceptional charges which meant that the increase in adjusted pre-tax profits from £5.1m to £5.6m in the six months to end June turned into a reported loss of £2.3m. Exceptional costs booked in the period include a hefty £6.6m provision for an onerous lease; a £5m charge for impairments of property and plant; and stock impairment of £1.4m, all of which relate to the announcement the day before these results of the creation of a compound semiconductor development centre (CSDC) of excellence in Singapore with joint venture partners WIN Semiconductors Corporation and Nanyang Technological University.
As part of its contribution to this joint venture, IQE will be providing facilities, equipment and intellectual property on favourable terms to the new centre, hence the £13m non-cash asset write-downs in this week’s half year numbers. IQE also booked cash restructuring charges of £3m, mainly relating to the acquisition of Kopin in January last year and one which has significantly extended IQE's market share and leadership in wireless industry supply. I had anticipated those restructuring costs, and am happy with them, but the asset impairment charges resulting from the investment in the CSDC was a bolt from the blue.
Investor sentiment will not have been helped either by a 17 per cent revenue shortfall in the six-month period, reflecting industry wide wireless destocking and currency headwinds. That said, these issues had already been flagged up in July’s pre-close trading update and the company has reiterated earnings guidance in line with analyst estimates. However, even though the shares are now priced on only 9 times fiscal 2015 EPS estimates of 2p, clearly investors are not buying into the story, and one I have been following closely for the past couple of years.
When I last updated the investment case I noted that to kick start the share price, analyst Lorne Daniel at broking house finnCap believed the "key to an improvement will be cash flow generation and reduction of debt". I agreed with that view at the time, and with a better second-half performance on the cards, I thought there was more upside potential than downside risk. However, there is no getting away from the fact that the company has since taken a £13m non-cash hit - a sum equivalent of 12 per cent of its market capitalisation - on a project where I am unable to quantify the upside to. That makes me uncomfortable to say the least. I understand finnCap have terminated coverage of the company.
It is also impossible to ignore the fact that other investors clearly feel the same way which is why IQE shares were marked down 11 per cent to 18p post yesterday’s results and now seem to be heading back to test last month’s low of 16.25p. As I have noted previously, IQE is one of the most frustrating companies I have ever covered. It is also one that has tested my patience once too often. When there are many attractive investment opportunities in the technology space, it makes sense to focus on those where the odds of delivering share price upside are more in our favour over the next six months. For instance, I highlighted the investment appeal of K3 Business Technology yesterday (‘Tapping into retail growth’, 16 September 2014). In the circumstances, I have decided to exit the holding.
Please note that Cenkos Securities (CNKS: 250p) has reported half year results today. I will update my view shortly. I have also published another two columns today, both of which are available on my IC homepage...
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
