Broker tips: IQE, Spirent Communications, Future
Analysts at Deutsche Bank lowered their target price on semiconductor firm IQE from 60.0p to 40.0p on Wednesday, stating its second trading update this year pointed to an "awful" first half.
Deutsche Bank said IQE's first trading update in January pointed to a "reasonable performance" in the fourth quarter of 2022, with the potential for some destocking in the first half of 2023 led by the smartphone market.
However, the German bank said IQE's second update last week was "much more explicit and disappointing", reflecting higher visibility for the firm and their customers in March following Chinese New Year.
DB, which reiterated its 'buy' rating on the stock, highlighted that IQE now expects interim sales to be down by £30.0m year-on-year, equivalent to a 38% annual decline in USD terms.
"In light of the reduced loading of key facilities, adjusted EBITDA appears set to dip to breakeven," said DB. "IQE is pointing to the smartphone market as the key culprit with channel inventory of components and handsets into both the Android and Apple ecosystems. Both Wireless and Photonics are then similarly affected."
Berenberg upgraded Spirent Communications to 'buy' from 'hold' on Wednesday, citing a "great" entry point.
The German bank noted that it downgraded the shares last August due to a lack of immediate catalysts, difficult comparatives and a full valuation.
"While our downgrade did prove timely, at that time we had not yet anticipated that customers (eg telcos, network equipment makers) would delay their lab testing spend due to macro uncertainty," it said.
"With shares down circa 30% and trading at circa 14x P/E following the group’s profit warning for FY23, we think that now is a great entry point for a company that has high barriers to entry, is earning outsized returns on capital and has compounded free cash flow at a c18% compound annual growth rate from 2015-22."
Berenberg said it thinks customers are merely reacting to the macro conditions and, therefore, will not delay their standalone 5G build-outs for longer than 9-12 months, especially given that their spectrum and network build-out commitments are already in place.
Jefferies initiated coverage of media group Future on Wednesday at 'hold' with a 1,300.0p price target as it said it was cautious on the outlook.
"Future is a force in digital marketing and has scaled rapidly via earnings accretive (magazine & website) M&A," the bank said. "However, we are cautious on the outlook, due to the CEO transition and limited visibility (ad spend cycle & organic growth). We therefore view a 20% discount to peers (PE) as fairly valued."
Jefferies said its analysis suggests management's expectation of 10% long-term organic growth in media - which makes up around 65% of revenue - was "stretching". It noted that the current portfolio's online audience has remained flat on average over the past three years and said this was an indicator that organic growth will be difficult to drive sustainably, as other organic means of growth are limited.
The bank also said that the upcoming CEO transition creates strategic uncertainty that may deter the incremental buyer.
"The current CEO and the architect of Future's success to date will step down in Mar-23 after nine years in the role. We believe the incoming CEO, John Steinberg, is a very good fit for the business going forward, but it's hard to see a re-rating ahead of hearing his strategic priorities and an update on M&A."