IQE makes advanced silicon and compound semiconductor materials that chip companies use in wireless communication circuits. These semiconductors allow products such as smartphones to offer high speed communication with less power consumption. So, with connected devices and smartphones becoming increasingly complex, demand for IQE's wafer products has soared.
- Robust smartphone-driven demand
- Booming optoelectronics business
- Earnings growing fast
- Shares look cheap compared to those of peers
- Mixed semiconductor outlook
- No dividend payout
Smartphone sales - these accounted for just 22 per cent of handset sales last year - are expected by industry analysts to grow at 28 per cent per year, and to surpass 1bn units by 2015. So, with IQE's wafers sitting in a third of all smartphones, including Apple's iPhone, it's little surprise that IQE's wireless division - which generates around 75 per cent of group sales - reported 21 per cent underlying sales growth in the first half.
The roll-out of fourth-generation (4G) wireless standards - expected to commence in the first quarter of 2012 - should further propel demand for IQE's semiconductors. Chief executive Drew Nelson points out that there are four or five more advanced semiconductor materials contained within a 3G smartphone than was the case for a 2G smartphone. Similarly, 4G devices will require even more semiconductor materials in each device.
Other connected devices, such as tablets, will also drive growth. In fact, the number of mobile broadband enabled devices is forecast to rise from 100m units in 2010 to more than 350m units in 2015 and Mr Nelson is also expecting a boost from machine-to-machine communications, such as smart meters. Mr Nelson points to the impending launch of eagerly anticipated gadgets, too, such as the iPhone5, iPad 3 and potential iPad rivals, to underpin growth momentum. Such a backdrop should more than offset any concerns regarding the wider semiconductor outlook - some US semiconductor players, for example, have warned of oversupply and weaker demand for PCs and other consumer devices.
IQE (IQE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 28.5p | MARKET VALUE: | £150m | |
| TOUCH: | 28-28.5p | 12-MONTH HIGH: | 60p | LOW: 24.5p |
| DIVIDEND YIELD: | nil | PE RATIO: | 15 | |
| NET ASSET VALUE: | 13p | NET CASH: | £1m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2007 | 50.1 | -0.86 | -0.14 | nil |
| 2008 | 60.5 | -1.39 | -0.32 | nil |
| 2009 | 52.7 | 2.06 | 0.47 | nil |
| 2010 | 72.7 | 6.33 | 1.63 | nil |
| 2011* | 83.5 | 9.00 | 1.90 | nil |
| % change | +15 | +42 | - | - |
*Espirito Santo Investment Bank estimates (earnings adjusted - not comparable) Normal market size:10,000 Matched bargain trading Beta:1.21 | ||||
Moreover, and as the world's copper wires continue to be replaced with optic fibres, then IQE's burgeoning optoelectronics business - which accounts for 23 per cent of group sales - should also drive longer-term growth. In fact, Mr Nelson asserts that this will be the fastest growing part of the group - revenues grew 46 per cent organically in the last year and the division is set to replicate the scale and profitability of the wireless business. Underlying divisional sales rose by an impressive 32 per cent in the half year alone.
Such growth is proving a huge boost for earnings as the effects of operational gearing kicks-in - essentially, the profit multiplier effect that results from relatively high fixed costs compared with variable costs. Between 2010 and 2007 IQE's sales grew 45 per cent - but pre-exceptional operating profit soared from £613,000 to £7.2m - meaning an operating margin that rose from 1.2 per cent to 10 per cent over the same period. Just during 2010, revenue grew 38 per cent and IQE's cash profit jumped 63 per cent to £13.1m.
