Broker tips: IQE, Johnson Matthey, Biffa

Canaccord Genuity has upped its price target on IQE after the semiconductor specialist reported a surge in first-half revenues and forecast a return to profitability.

The bank was prompted to increase its price target to 70p from 60p after a recent trading update by IQE, in which the AIM-listed firm said first-quarter revenues were ahead of internal expectations, while second-quarter trading had been strong, despite the Covid-19 pandemic.

In a note published on Monday, Canaccord upped its 2020 sales estimates from £139.4m to £157.5m and increased forecasts for earnings before interest and tax for both 2020 and 2021.

Canaccord said: "The demand strength seen earlier this year has continued, helped by 3D sensing content gains in Apple’s iPhone 12, the ramp-up of 5G and strength in the US military. As a consequence, IQE expects a blow-out first half.

"Short-term demand visibility remains limited, as the second leg of the Huawei ban and slower wafer restocking in wireless could impact momentum into the fourth quarter. However, we believe our raised estimates largely reflect these risks as they imply only flat revenues year-on-year in the second half."

Canaccord added that with the group's strong first-half performance driving its first upgrades in the last two years, and reducing its financial risk profile, it also saw fit to reiterate its 'speculative buy' rating.

Analysts at Berenberg raised their target price on diversified chemicals group Johnson Matthey from 2,400.0p to 2,700.0p on Monday, but stated that it was "a bad day for good news".

Berenberg highlighted that Johnson Matthey's full-year results revealed some long-awaited help from working capital, which left net debt over £300m lower than expected at £1.1bn, while underlying earnings were broadly in line.

But with shares down in early trade, the German bank said the market's lacklustre reaction to the firm's 2020 full-year results were both "difficult to understand and likely to be short-lived".

"The hitherto successful bear case has been to cry 'value trap', and highlight headwinds from automotive cycle, higher working capital and the failure to become competitive in new technologies for cathode materials and hydrogen," said Berenberg, which pointed out that all of those arguments were actually weakened due to the results.

Berenberg said automotive sales were not "plausibly going to deteriorate in 2021", working capital backlogs were on track to fall and the group's new technologies in eLNO and hydrogen actually appeared to be "gaining traction".

"The additional £80m of three-year costs savings should allow for a pleasing rebound in FY 2022," added the analysts, which stood by their 'buy' rating on the group.

Analysts at Citi upgraded their recommendation for shares of Biffa from 'sell' to 'neutral' following the company's recent successful cash call.

Monday's decision followed a downgrade on 9 June in anticipation of the impending equity dilution.

Now, however, the investment debate around the waste management firm was more "balanced", what with the roughly £100.0m of newly raised equity sitting on its balance sheet.

Indeed, the group should be "well-positioned" to consolidate any distressed Industrial and Commercial competitors, Citi judged.

"This roll-up opportunity is an important component to the Biffa bull thesis," the broker continued.

"We balance this upside against the potential for prolonged distorted market conditions and the structural challenge in Landfill Gas (about a quarter of group profits) where subsidy expiry in 2027 could see profits evaporate."

On the basis of an 11 times enterprise value-to-earnings before interest, taxes, depreciation and amortisation, Citi's target price for the shares was unchanged at 210.0p.