Global semiconductor component supplier, IQE (LSE: IQE) is falling today, after the company reported a first half pre-tax loss for the six months to 30 June 2014.
Down around 10% at time of writing, IQE’s shares have reacted badly to today’s news, although after reading through the results, I feel as if the market has overreacted.
Strong underlying figures
Indeed, for the first half of the year IQE reported a pretax loss of £2.3m, compared to profit of £2.5m the previous year. However, the group noted that its reported pre-tax loss included £4.8m non-cash exceptionals and £3.1m of restructuring costs. On an adjusted basis, after removing restructuring costs, the group’s pre-tax profit rose by 11% during the period to £5.6m, from £5.1m as reported last year. Adjusted earnings per share increased to 0.86p, from 0.79p.
That being said, IQE did report a fall in revenue for the period, from £63m as reported a year ago, to £52m. Management blamed this reduction on an industry-wide inventory reduction and the strong sterling to U.S. dollar exchange rate. Net debt for the period rose by £1.1m to £35.5m.
Commenting on the results, Dr Drew Nelson, IQE Chief Executive, said:
“The Group has again demonstrated the resilience of its business model through the delivery of continued growth in profitability despite the lower than expected revenues resulting from adverse effects of a significant inventory correction in the wireless industry and the translational effect of a strengthening of the sterling exchange rate against the US Dollar…Having established a world-leading position in the wireless communications market, IQE is beginning to replicate this across our other markets…”
Plenty of good news
Aside from today’s profit warning, IQE is making solid progress across all of its markets. In particular, despite the de-stocking, which affected the majority of the semiconductor industry, IQE managed to achieve a 22% increase in Photonics revenue during the period. Photonics are opto-electronic products spanning a wide range of consumer and industrial applications such as infrared sensing and solar applications.
What’s more, IQE has history on its side, with 25 years of technology leadership with a rich heritage of intellectual property and unparalleled economies of scale. All in all, IQE is well placed to grow and City analysts are expecting a return to growth after today’s speedbump.
For example, on an adjusted basis, excluding restructuring costs, City analysts expect IQE to report earnings per share of 2.22p this year, which means the company is trading at a forward P/E of 9. Further, the City has earnings per share growth of 14% pencilled in for next year. As a result, IQE is trading at a 2015 P/E of 7.9.
A P/E of 7.9 looks cheap for a company that’s expected to report double-digit earnings growth.
