Canaccord backs IQE for growth after company accused of misleading investors

Commenting on the recent accusations from short-sellers Muddy Waters and ShadowFall, Cannacord analysts said they "don’t subscribe to the view that the joint ventures (JVs) were created to 'deceive investors' and that IQE's accounts are entirely consistent with those of its JVs."

The Canadian broker added: "Recent weakness caused by the short sellers has created an attractive entry point which offers substantial upside to our unchanged target price of 190p."

In a research note sent to clients, the broker further argued that it believes IQEs margins for the second half of 2017 will be strong after a company trading update on 20 December said that revenues would not be less than £150m.

Canaccord analysts also stated that Muddy Waters and ShadowFall had failed to note IQE’s potential after focusing on its JV’s, stating that the company has seen "no change of accounting policy" and that its figures are "entirely consistent with the JV accounts."

Speaking of IQE’s realistic potential, the analysts argued that "it is unrealistic to expect a JV created just two years ago to have either filed any patents or generated a profit" and that there are "many other mass-market opportunities for compound semiconductors (CS), whose superior properties make them preferable to silicon for many applications."

IQE has identified CS wafer markets that it expects to be worth $4.1bn in 2022 and as such Canaccord has projected increasing year on year sales for the company, up 13% to £150.5m in 2017 and a further 15% to £173m in 2018.

Aside from the company’s CS development, IQE’s VCSEL wafers were used in the latest iPhone and Canaccord analysts noted that "applications beyond smartphones are extensive and we believe IQE can now look forward to a prolonged period of rapid growth."

Canaccord does not expect IQE to pay out any dividends in the near future.

"In short, we believe this note demonstrates that IQE did not create the JVs in order to inflate short-term revenues and cash flows, as the bear reports have suggested. More importantly, we believe that IQE is at the beginning of an exciting journey and has the potential to become a leading global player in the fast evolving compound semiconductor industry."

As of 1345 GMT, IQE’s shares were down 6.4% at 130.10p.