Canaccord Genuity upgrades IQE to 'speculative buy'

Canaccord said IQE investors could be forgiven for thinking that good years were "more often than not" followed by bad ones - with solid outperformances in 2017 and 2020 followed by "leaner years".

However, while the analysts stated 2021 saw several demand drivers soften in its photonics and wireless unit, organic growth slow to broadly flat year-on-year and foreign exchanfe lead to a roughly 8% hit to reported revenues and 25% to underlying earnings, they also added that they believe 2022 will see top-line growth accelerate to more than 10%.

The Canadian bank, which also upped its target price on the stock from 55.0p to 65.0p, reckons this will take place due to an expected sharp recovery in Chinese 5G base station deployments, growth in 5G smartphones and an annualisation of the impact from smaller VCSEL chip sizes at Apple and a weakened US dollar.

"With our expectation for growth and earnings momentum to accelerate in 2022E, we view this as a compelling buying opportunity. We believe the relatively depressed valuation could also trigger potential M&A interest, as IQE is the largest independent compound wafer & materials supplier with strong market positions in GaN & GaAs," said Canaccord.

"While most recent sector M&A has focused on Silicon Carbide (for EVs/charging), IQE could be attractive for compound chipmakers, in our view, considering to insource wafer manufacturing and/or silicon wafer suppliers that may consider expanding into the compound space. We estimate historic transaction multiples of ~4.4x sales could imply material share price upside to >80p/share in an M&A scenario. Our target price is based on a 75%:25% blend of a standalone 2.7x EV/Sales (58p/share) and our hypothetical M&A valuation of 86p/share."