IQE (IQE) swung to an operating loss of £18.8m in 2019, on falling sales, a reduced gross margin and increased central costs. However, management noted that trading in the first quarter of this year was slightly higher than internal expectations and that the outlook for the second was ‘positive’. But the risk of an economic downturn looms, and a drop-off in global demand for smartphones and other electrical devices could squeeze earnings further.
The semiconductor manufacturer saw its gross profit slide from £37.5m to £21.4m in 2019, which it attributed, at least in part, to the under-utilisation of its assets, ironic given it has been expanding capacity over the past few years, with £31.9m of capital expenditure allocated through 2019 as it completed the infrastructure phase of its programme.
Given the difficult trading environment caused by coronavirus, management provided forecasts for a ‘severe but plausible’ downside scenario: it assumed a reduction in revenue by a third in the second half of 2020, followed by a reduction of a quarter in the first half of 2021, though this would be partially offset by controllable working capital and capital expenditure mitigation. As a precaution, however, IQE has increased its credit facilities to navigate the tough market conditions, putting in place a £30m asset financing facility and securing a formal agreement to relax debt covenants in December 2020 and June 2021.
That is prudent given the group exited 2019 with £8.8m in cash, though only £2.2m in bank borrowings is due through 2020. It does not pay to have capital locked-in, even though the rest of us are. And it is doubtful management had a pandemic in mind, but IQE has reduced inventory as a proportion of sales through 2019. The group also managed to pare back receivables by 13 per cent, while reducing trade payables by 43 per cent.
Broker Peel Hunt forecasts an adjusted pre-tax loss of £6.6m and a loss per share of 1.7p in 2020, against £7m and 2.4p in 2019.
| IQE (IQE) | ||||
| ORD PRICE: | 40p | MARKET VALUE: | £ 319m | |
| TOUCH: | 38-42p | 12-MONTH HIGH: | 96p | LOW: 19p |
| DIVIDEND YIELD: | nil | PE RATIO: | na | |
| NET ASSET VALUE: | 34p* | NET DEBT: | 24%^ | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2015 | 114 | 19.4 | 3.0 | nil |
| 2016 | 133 | 18.4 | 2.7 | nil |
| 2017 | 155 | 15.1 | 2.1 | nil |
| 2018 | 156 | 6.7 | 0.1 | nil |
| 2019 | 140 | -24.9 | -4.5 | nil |
| % change | -10 | - | - | - |
| Ex-div: | na | |||
| Payment: | na | |||
| *Includes intangible assets of £118.5m or 15p a share ^Includes lease liabilities of £48m | ||||
