The wafers, produced using IQE's (IQE: 29.75p) high-volume MBE tools, were processed by IQE's strategic partner Solar Junction Corporation, a developer of high-efficiency multi-junction solar energy cells for the CPV market. The standard three-junction solar cells are believed to have set a new world record for production-scale CPV wafer technology and improved efficiency over Solar Junction's previous record in October.
To put this into perspective, this efficiency rating is more than two percentage points better than the last record, achieved in April, and is almost nine percentage points higher than efficiency levels used in commercial systems today. Analyst Alexandra Jarvis at brokerage Peel Hunt notes says that "this further step up should accelerate the adoption of the technology and increase the geographic areas in which it is cost-efficient to install. It compares with standard silicon solar system efficiency in the high teens".
Ms Jarvis adds that Amonix's current system uses a solar cell from Spectrolab, but is now working with IQE's joint venture partner Solar Junction (Amonix announced a co-development agreement in February), which "anticipates achieving considerably higher module efficiencies and breaking world records in the very near future".
Mr Drew Nelson, chief executive of IQE, notes that "improvements in CPV cell efficiencies translate into highly significant overall cost reduction in terms of installation and energy generation in utility-scale solar farms. The fact that this has been achieved on production qualified platforms is a major milestone". This offers the potential for the technology to be applied to areas with an average level of sun (DNI, or Direct Normal Irradiance), whereas all the systems today are for high DNI areas.
This scientific breakthrough has major implications for IQE since the company is the exclusive wafer supplier to Solar Junction and also owns 9 per cent of the company. Moreover, if adoption of CPV technology accelerates faster than the industry has forecast, and if CPV can be adopted earlier in a wider range of geographies, this offers forecast upside for IQE's profits in 2014 and 2015.
Anomalous valuation
Even before factoring that in, IQE's shares are hardly overpriced, trading on 12 times Peel Hunt's EPS estimate of 2.3p, up from 1.5p in 2012. It's worth noting that the company's board confirmed in a pre-close trading update in July that it was trading in line with analysts' earnings estimates so is bang on course to ramp up earnings this year. Moreover, based on an increase in sales from £139m to £159m in 2014, Peel Hunt expects IQE to deliver pre-tax profits of £23.1m and EPS of 3.5p. In other words, this is a company set to deliver 133 per cent earnings growth over a two-year period.
In the circumstances, for the shares to be rated on a modest eight times earnings estimates for 2014 is clearly anomalous. And that's before you factor in IQE's potential to ramp up production; the company currently has capacity to manufacture $35m (£22.4m) of wafer materials each year, but the earnings forecasts from Peel Hunt only factor in sales of £5m and £8m, respectively, in 2014 and 2015.
Ahead of half-year results in mid-September, I am very comfortable rating the shares a buy on a bid-offer spread of 29.5p to 29.75p, even though they have risen 40 per cent since I covered the investment case in quite some depth last month ('Awaiting a catalyst for a re-rating', 11 July 2013). I maintain my conservative target price of 35p, which is significantly less than Canaccord's price target of 65p. Both N+1 Singer and Peel Hunt have target prices around 45p.
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