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IQE – A world leader from Wales (there has to be one)

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Like a capitalist-supporting article in the Guardian or a Gordon Brown appearance in Parliament, AIM-listed IQE plc (LSE:IQE) is a rarest of things – in its case a Welsh world leader in an economic space. The company is a leading global supplier of advanced ‘wafer’ products and services to the semiconductor industry – which then utilises them in the chips which comprise the key components of high-technology systems. Having taken a healthy profit on the shares in August 2010, I re-recommended them at 24.75p in February of this year on t1ps, the website I departed in September having edited it for the 12 years since its launch in 2000. Following a contract announcement today the shares currently trade at 27p and the following reviews this announcement and the investment case from here…

© Tom Winnifrith

 IQE has today announced a first single order of more than £1 million for advanced laser wafers to enable a new generation of fibre-optic communications devices – this to be delivered during the first half of next year and there “further significant” follow-on orders expected. The company noted this is “driven by strong demand in China for datacentre applications and infrastructure build out” – reflecting what the company emphasises as its “clear leadership position in the design and supply of advanced semiconductor wafers for a wide range of optoelectronic applications”.

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 IQE reported revenue of £34.28 million for the first six months of calendar 2012 – so today’s order is not immaterial in terms of current contribution as well as offering obvious encouragement for the future – where IQE’s exposure to the ever-increasing demand for higher speed and improved performance from modern devices looks to position it strongly.

I re-recommended the shares as a recovery play after a warning that inventory corrections by some the company’s major customers – reflecting some market share shifts between chip companies and the difficult macroeconomic environment – had impacted its financial performance. However, IQE noted then that the shifts would only impact until the qualification with customers of additional capacity and new products was complete and that it was “engaged in increased and accelerated qualification activities which should strengthen our market share across the customer base and help further mitigate individual customer risk”. Reflecting this, 2012 earnings per share are expected to come in a touch lower than 2011’s 1.85p, though with growth to more than 2.2p per share and 3p per share respectively anticipated for 2013 and 2014 – this as the company also benefits from its high level of operational gearing and tax losses it has available (to offset more than £30 million of future tax charges). I currently, cautiously, hold these latter earnings numbers ahead of an update on current trading anticipated in January.

You can find more detailed analysis on the numbers HERE

I continue to believe this company’s profile – a rare technological leader from the UK serving global growth markets which have significant, particularly intellectual property-based, barriers to entry – merits a premium rating. As per my piece last month (to read click here), I believe that an earnings multiple of 15x will be exceeded in due course as the company wins back investor confidence – but even this rating continues to make these shares a recovery buy from current levels.  That implies a two year target of 45p.

Libertarian investment writer Tom Winnifrith writes extensively for a number of US and UK financial websites. All of that material appears on his own blog, which also carries his extensive original non financial material, at – for alerts on all Tom’s writings follow him on twitter at @tomwinnifrith




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