IQE bullish on 5G even as Asian supply chains race to rebuild

IQE sounded a confident note on the outlook for growth on the back of the advent of 5G, despite the challenging market backdrop, including the need to adapt to the shifting supply chains of its clients, that drove it into a loss at the half-year stage.

Significantly, during the period the firm completed the infrastructure phase of building at its Mega foundry in South Wales, increased its capacity in Taiwan by 40.0% and invested in GaN capacity at its Massachusetts operations in anticipation of 5G related deployments.

Company boss, Dr. Drew Nelson, said: "These investments in the Group’s global manufacturing footprint, coupled with IQE's unique breadth of compound semiconductor materials experience and IP portfolio, position the Group well for future growth and margin expansion as volumes increase, driven by the growth opportunities in 5G and connected devices."

The manufacturer of advanced compound semiconductor wafers blamed the "weak smartphone handset market", declining demand "in the context of a technology market slowdown" and international trade tensions for the 9.1% drop in sales over the six months ending on 30 June to reach £66.7m.

Its wafers were used in handset devices, global telecommunications infrastructure, connected devices and 3D sensing.

On an adjusted operating profit basis, the company's gearing towards production at high volumes and an associated £2.4m amortisation and depreciation charge linked to investments in capacity pushed IQE into a loss of £1.9m , versus a profit of £7.6m in the comparable year ago period.

Together with a one-off non-cash deferred US tax charge, on account of "a shift in the balance of future projected manufacturing between the US and UK / Asia", that saw the company recorded an adjusted loss per share drop of 1.29p after 0.76p one year ago.

Cash generated from operations also declined, from the £7.6m seen in the comparable period of 2018 to £4.0m on the back of lower trading volumes, although IQE said it had agreed an additional £30.0m asset financing facility post period-end.

That raised the total financing available to it to roughly £57.0m with £12.0 drawn down as of 12 June.

Guidance reiterated despite uncertain backdrop

Management reiterated its guidance for full-year sales of £140.0-160.0m, but said that various factors would impact on its outlook.

Those included the uncertainty around the geopolitical landscape - especially the confidence for supply chains to rebuild inventory - the market for smartphone handsets and the speed with which Asian supply chains would rebuild and get up to speed in terms of product qualifications, which would determine the volumes of initial orders.

The mid-point of the projected range for its sales would equate to a roughly 3.0% dip in full-year revenues.

IQE also reaffirmed a previous forecast for an adjusted operating profit margin "significantly" below its original guidance of over 10.0%, blaming low capacity utilisation and a higher number of continuing product qualifications, although the group expected to remain profitable .

Capital expenditures meanwhile were pegged at £30.0-40.0m depending on the timing of its decision on whether to invest more at either Newport or in Taiwan "which is discretionary depending on prevailing market conditions".

"The Group has sufficient installed capacity to underpin significant revenue growth," management added.

Looking out to the medium-term on the other hand, the outfit said the macro trends associated with 5G and connectivity would drive "significant growth for compound semiconductors over the coming year".

IQE also highlighted how it simply supplied the wafers but was agnostic as to the eventual winners and losers at the chip and original equipment level as well as the high barriers to entry in its industry.