IQE lays second profit warning fears to rest

IQE, the supplier of advanced wafer products and services to the semiconductor industry, said 2011 revenues should show a small increase on the year before, despite a slow-down in orders in the second half.

Full year revenues for 2011 are expected to exceed £75m, up from £73 million the previous year. Earnings before interest,tax, depreciation and amortisaton (EBITDA) are also expected to increase, to at least £13.7m.

Broker Peel Hunt said that while sales were in line with expectations, earnings were slightly higher, due to better than expected margins.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

"EBITDA margin should be in line with last year at c18%. This is a good result

given that reduced sales impacted suddenly in Q4 [fourth quarter]," Peel Hunt said.

Net debt is expected to be less than £4m, slightly better than the market consensus was expecting.

The company revealed in October that second half sales were being adversely affected by inventory corrections in the supply chain related to market share swings among a couple of IQE's key customers. These inventory corrections have unwound as expected, and should be fully resolved by the end of the first quarter of 2012, the company revealed.

New product qualifications have progressed well, IQE said. The group has successfully qualified its leading edge BiHEMT ((Integration of Heterojunction Bipolar and High Electron. Mobility Transistors) product with one of the top three Japanese mobile chip manufacturers, which has recently announced a major expansion programme in the smart-phone market. Sales under this qualification have started to ramp, and this customer is expected to move into IQE's "top 10" customer list during the second half of the current year.

IQE is also in the final stages of qualification of BiHEMT products with two of the leading wireless chip manufacturers globally and expects to ramp into production during the second quarter. In addition, the group is qualifying a number of next-generation wireless products with a significant number of customers.

"Our core business of wireless-related products for all forms of mobile communications is performing as expected whilst new and emerging products for consumer, industrial and defence applications are generating demand across all our key markets," claimed IQE's Chief Executive, Dr Drew Nelson.

The shares rose 1.75p to 25.25p on the trading update, and have risen by more than one-third over the last month; they are no longer worth chasing higher, in the view of Peel Hunt, which downgraded the shares to "hold" from "buy". The target price remains at 23p.

finnCap, however, is sticking with its "buy" recommendation, which is not surprising given that it has a 30p price target.

"The year-end trading update reveals numbers largely in line with our expectations. Revenues are fractionally lower and EBITDA £0.5m ahead of our revised expectations following the October profits warning. The £4m net debt at the year-end is slightly lower than we thought, with perhaps some of the investment in new equipment slowed to adjust for the revision," finnCap analyst Lorne Daniel said.

"We expect a reasonably strong year ahead driven by continued strength in mobile and the growing strength of the GaN [Gallium Nitride] technology, Daniel added.

jh