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IQE 20 December 2013



Seeking out stocks that are currently trading on lowly price earnings ratio’s, has become something of an uphill task of late as the markets have continued to remain strong.


That is, despite the slight unease in relation to the Federal Reserve’s tapering of its quantative easing programme, which had actually seen a few stocks come off a bit.

I am sure, that many of us are cautious on both accounts of paying too high a price for growth or equally, picking something up on a single digit PER, which is perhaps discounted for a very good reason.


Despite the obvious caution I have found myself taking a look at IQE the Cardiff based Semiconductor wafer business, which is currently priced at 22.5p.

Although the company operates in a sector that can actually be highly cyclical and competitive, things appear to be going rather well here at present and the shares trading on a PER of only 9 based on next years forecasts look interesting to me.

 I guess of course, the big question is how well placed IQE actually is to  deliver, as we all know Broker notes should be taken with varying degrees of salt pinching.


That said, the most recent Interim results from the company back in September, were pretty robust coming in ahead of Broker expectations and where the company recorded record financial results.

Revenues increased sharply, rising by 84% to hit £63m which were boosted by three strategic acquisitions that have been made over the last eighteen months or so.


These included Kopin Wireless an American based business, which IQE stumped up a tidy $75m for back in January of this year.

That purchase also saw the company successfully raise £16.5m via a placing which was pitched at 29p per share, subsequently sending them sharply northwards to hit 38p at one point.


While companies that make such quick acquisitions can invariably hit problems relating to integration or poor synergies, thus far IQE appears to be getting it right and Kopin particularly, looks a positive move.

Boosting its presence within wireless which generates more than 80% of group sales, Kopin has now presented IQE with a large chunk of the market for specialist wafer materials that enable “Bluetooth” communication.   


While nothing can be taken for granted, things nevertheless look promising further ahead for the company as the board has already stressed that it is confident of meeting the market expectations for this year.

Wireless aside, IQE is also making solid progress within the concentrated photovoltaic (CPV) market, which sees optics such as lenses or curved mirrors enabling the concentration of large amounts of sunlight onto small areas of PV cells to generate electricity.


The company has already announced earlier this year that its wafers have been independently certified as achieving 44% cell efficiency by the National Renewable Energy Laboratory, which potentially sets a new world record for production scale concentrated CPV wafer technology.

Within this field, IQE is working closely with its strategic partner

Solar Junction Corporation which based in San Jose California manufactures high-efficiency solar cells. That company in turn, has a strong tie up with Amonix a global leading installer of CPV systems, which puts it in a sound position to capitalise on expected growth, which would also feed through to IQE.

Although IQE currently has a net debt position of £34.8m, Broker Canaccord Genuity  anticipates this reducing sharply to £14.5m by 2015 as revenues begin to ramp up.


In relation to servicing borrowings the interest cover looks comfortable at a current 12.6 times from earnings, which according to the Broker should rise to as much as 19 times by 2015.

Canaccord aside, which incidentally has a 65p target price, FinnCap, N+Singer and Peel Hunt also have buy positions on the stock.

While not without the usual risks in relation to cyclical factors on one side of the business to adoption factors on the other, I feel IQE is at least worth my keeping an eye on.

Particularly, if it can deliver the forecast pre-tax profits of £12.m for this year, followed by next years target of £16.9m, which would give EPS of  2.5p.   


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