IQE. Does History Repeat Itself ?

25th Jul '17 by Ken Lowes

32 comments 9980 reads

There seems to be a lot of excitement regarding IQE and it bothers me because I sold too soon and only made 22%, if I had held I would have added another 100%. This is also making my averages for selling look not so good and I have had a wonderful run this year with 75% of all sales now in negative territory. But I digress.

Because I am now an injured bear I decided to look and see what the fuss was all about and this is what I found.

In 2009 this very same share took off from a base of 3.5p, there was a big kick in volume about half way through this rise which peaked after two years at 59p, someone bought at 59p! It then declined over the next eight months back to 19p,. It then doubled in value only to lose it all again.

The most recent rise commenced at 14p in July 2016, just one year ago and here we are at 109p but why?

A quick look at the accounts show that last year was a not as good as the previous year when at least in 2009 the figures more than doubled and continued to do so for a couple of years. But the improving results didn’t stop the decline in share price.

The other problem is the power of the group, if the king tells you he has bought and he is a great king, his followers might just follow, hopefully the king will tell his followers he is going to sell--prior to doing so.

The more I read the blog re this share, the more I get that old feeling of déjà vu, for Wales read Northern Ireland and motor cars, as for poor Minervini he gets blamed for everything? Minervini says “don’t go against the marker sentiment” I did hear correctly, the BOE telling us all that they are fearful of rising domestic debt along with other issues. No problem, we just sell, I don’t think the buyers will be out when the fan gets covered, unless of course someone buys at 59p or whatever the top is going to be.

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pka

26th Jul '17

Hi Ken,

"What I cannot reconcile is the actions of the two main Executive shareholders who sold a substantial 40% plus of their holding four months after the Mello presentation. If I was in such a position as the one presented to potential shareholders I certainly wouldn’t be selling."

You may be right in your suspicions. However, an alternative point of view is that those executives may be risk-averse and didn't want most of their investment eggs to be in the same basket as their job. They're might be kicking themselves now, as the share price has gone up a lot since they sold.

vik2001

herbie made a good point on another thread:
I would generally agree, however recently after large founding directors sales, some shares how shot up, for example: IQE (LON:IQE), Purplebricks (LON:PURP), Fevertree Drinks (LON:FEVR), accesso Technology (LON:ACSO). I did sell after accesso Technology (LON:ACSO) sales ' 950p, since then the share price doubled.

exec or directors sales doesn't always mean trouble is looming or something suspicious is about to happen. though we are all programmed to think that as part of being cautious investors.

i sold out of accesso early also after the director sales only to keep watching it go up after.

Ken Lowes

Check out the Mello presentation and compare the graphics which appear 20 minutes in with those on your StockReport in addition check the net debt Rasmussen says it has reduced, it appears on the report to have risen back to where it was in 2013. The presentation suggest that they are on the brink of something good, the next phase in the companies progress, and you dump 1.9m shares leaving yourself 1.57m. Nooooooooo, They might be a very good reason but I can't think what it could possibly be. So figures are different to those published on both Stocko and Sharepad, Debt is up when they say it is down. Sold more than half the holding four month after the presentation increasing the value by 50% -- probably a really good explanation? I am not saying don't buy or even sell. Just be careful you don't get crushed by one of those trucks reversing up to the door.

i bought a massive chunk of IQE after the update, these were my notes I made:

- semiconductor group upped its full-year guidance and told investors that more “significant upgrades” could follow.

- all of its business units had progressed in line with expectations, although it highlighted its photonics unit as the “standout” performer. Note: double-digit growth and offering substantial long-term upside e.g. in fibre optic communications.

- in a good position to deal with the expected higher levels of growth in the second half of the year, having recently agreed terms for the lease of new premises in South Wales.

- chief executive said “In light of recent progress and its increasingly confident outlook, the board expects the group will now exceed market expectations for the full year and whilst it remains early into the start of the mass-market adoption of our technology, it is possible that with the current contract momentum, a more significant upgrade to current market expectations could be delivered for 2018.”

my note "IQE have talked up the share price before only for it to fall as ken mentioned."

- possibility of a deal with Apple that will see its technology feature in the Cupertino-based iPhone, due for launch in September. This is speculative but if it turns out true share price will rocket.

- balance sheet still looks decent enough with fairly manageable levels of debt. Operating margins, returns on investment and cashflow have all improved over the past couple of years. No dividend.

would I buy the shares right now if I didn't already last week? without a Apple deal in the bag, the valuation is also a little too rich. but I also got a feeling the bull market is going to kick off again in force come August, after the breather we just had in the markets. Being a momentum investor I'm in as I feel this share is one to ride in the bull wave.

IQE the next ARM perhaps? massive massive potential in this stock but going to get burnt if something goes wrong, I got a bit excited making this my biggest holding - and that makes me a little nervous for the first time ever. But I'm thinking its in a niche area including the fact that smartphones are now an undeniable part of all our lives, afterall I wake up in the middle of the night checking my phone :)

Monty9

I have held through thick and thin since 2009 (not at 3.5p sadly more like 9.5). It always seemed undervalued given its tech IP, specialised staff and potential in the market. As a small company the EPS has bounced around as distribution lines used them as a shock absorber for swings in market demand.
Nevertheless it has averaged an underlying 20% p.a. increase, which is about what Warren Buffet managed over his career. Of course the PE was much more appetising last year at 7 last year vs. 32 now and I sold 33% of my holding. I expect to run the remainder for a while however.

The breadth of markets they now address has increased greatly and, perhaps surprisingly, the more recent revenue streams have been more profitable than the mature business. It just feels like a company that has made it, if not to the top table, then to big school, and will do well there. In short I hold more for what I think the company can do from here than what it has done. Having said that, apart from the timing of their share sales (possibly more to do with personal need and banking some wealth than optimising profit - there have been no divvies - and they still hold plenty to become wealthy from future rises), management have done a pretty solid job. This is by no means low risk, but IMHO it is one of the few that has the realistic opportunity to 10 bag again. Now I need to sit down and read again the annual report and broker analysis to see if I feel the same way after doing my homework.

bestace

Ken, I'm not sure what your point is on the net debt because that Mello chart only reports actual year end figures up to FY14 and we've had two further years of actual figures reported since then.

The net debt chart in the Mello presentation is asterisked to indicate FY12 has been restated to include balances relating to the acquisition of Kopin Wireless in January 2013. That was 2 weeks after the year end so Stockopedia is showing the reported net debt figures for FY12 which obviously excludes the effects of that acquisition.

The FY13 and FY14 net debt figures shown in the Mello chart are identical to the figures reported on the Stockopedia stock page.

The Mello chart then shows H1 2015 figures (which obviously won't appear on the Stockopedia chart as that shows year end figures for 2015), and a forecast figure for FY15, which turned out to be £2.1m higher than the actual outturn.

In FY16 they spend additional funds on capex in anticipation of increased demand for their products (which is now materialising), and they paid the final deferred consideration for the Kopin acquisition. This was all clearly flagged e.g. in the interims released on 13 September 2016:

Since 31 December 2015, net debt increased by £10.4m to £33.6m largely reflecting that in January 2016 the Group settled the final balance deferred consideration from the Kopin acquisition (£10.7m)

and in trading update on 14 December 2016:

In response to this opportunity, the group has increased its capital investment in H2

So the fact that net debt has increased since FY15 does not contradict the FD's comments from 18 months ago at the Mello presentation, nor is it a reflection of poor trading conditions or prospects for the future. Quite the opposite in fact.

And despite the increase in net debt at the last year end, it amounted to around 1.2x EBITDA, so it's hardly putting stress on the balance sheet.

Brilliant Leader

Ken, it is 16 months between Mello preso and share sales - Jan 2016 the former and May 2017 the latter. At the Mello preso he was clear that he is risk averse and didn't see markets as logical. On that basis, diversifying for long-term retirement planning seems entirely reasonable to me. Executive interests are still firmly aligned with shareholders.

Ken,

If you haven't already seen this (somewhat technical) video of a recent intereview with IQE's CEO, you might find it of interest, because he explains some of the opportunities he sees for ICE's business in the next few years::

https://www.youtube.com/watch?v=t-EihVaxIyA

Whether IQE's current share price is a fair reflection of its future prospects is another matter, of course.

27th Jul '17

Vik2001, You wondered whether IQE is the next ARM. An important difference between ARM and IQE, which I think is not in IQE's favour, is that ARM does no manufacturing so its capital expenditure is relatively low and its return on capital employed is very high. On the other hand, IQE regularly needs to spend money on upgrading its manufacturing equipment and on research and development in order to keep ahead of its competitors.

Having said that, IQE's business is very diversified in terms of the many different possible applications of the wafers it manufactures, and there is great potential for future growth in many of those applications.

I GOT IT WRONG So apologies to pka vic,bestace,crazy,Monty and anyone else that thinks I am a prat- I thought the Mello presentation was 2017, not 2016 and when I read your reply Bestace my world collapsed along with my argument. I still think that this whole explosion in price has issues, but my biggest suspicions and concerns have been answered. The argument is overwhelming and well made but I have to await the outcome. If I could invest and I can't because when this market falls and prices get back to reality it will be fierce and I don't want to get caught in it, so I will possibly lose out in the meanwhile. Thanks for the reply's I will now go and take my pills and rest a little.
Ken

PKA by comparing it to ARM I meant in terms of IQE being a british success story; also the new place in south wales could be creating up to 5,000 jobs I read somewhere - that's good for the economy. as long as their updates outperform this share is going to the moon.

Ken always good to be cautious and query everything, I enjoyed this post as it made me go back and double check everything. I have to admit I bought this share before doing much research which is what made me more nervous at first with this purchase.

Yes the markets are toppy but doesn't mean theres a crash on its way, that's just what we assume as humans we can be fearful. The world is changing, its innovating at the same time which can justify big surges.
Cash savers are getting no where in savings, so being in the markets makes sense for most.

I believe the 2nd half of the year will continue with the bull run. Lots of people are saying the market may peak out, there can be sharp correction and all these dooms sayers are always there in the market. What is next? The next is continuing with the bull market we are in.

The future potential is what decides the stock price so I would say the market is well aligned to earnings of the companies that are doing well. If its well aligned then there is more scope to go up further in line with the earnings. However no doubt there will be short corrections at points along the lines as nature in these markets take their course, but I don't forsee a crash (however I don't have the mystic ball I would like to have). Enjoy it while you can, or sit back and enjoy the ride - whatever line takes your fancy :)

muckshifter

Although not a holder, I've been interested enough to watch the Mello presentation after all the recent enthusiasm here. In terms of the directors' share sales, one thing no one here has mentioned is the clarification that David asked for, and received, at the end of the presentation (all IIRC of course!). It concerned the directors doing one of those substantial share backed loan agreements, obviously some time before the Mello meeting, and the fear was that it similar to the recent crooked dealings of a certain company Quin.. something or other.

Without checking into the past RNS details, a loan on the security of their shareholdings which was used to buy many more shares as the CFO confirmed, which proved extremely successful, would make absolute sense of the subsequent sale, allowing at least the "risk averse" CFO to repay his debt and reclaim his original shares while pocketing an excellent profit on the shares bought with the loan proceeds.

Hope I'm not talking out of the wrong orifice.

Just had a quick look back, in the absence of any comment confirming or denying my point, and found that the RNS of 13/11/14 just about confirms my point, with the major loan made at that time being repayable by I think it was October this year. That's a relief, memory still working!

rhomboid1

Thx muckshifter, that makes perfect sense .

Edit - wrong thread

Ken, There's no need to apologise. It's always good to understand both the bear and bull arguments for a stock. Anyway, your original point of view might turn out to be the correct one - time will tell! And your post has prompted an interesting and informative discussion.

28th Jul '17

Thanks pka, that means a lot.
Ken

vik2001, Thanks for your post sharing with us the notes you made after the latest IQE update. I agree with most of the points you made, but you wrote:

- possibility of a deal with Apple that will see its technology feature in the Cupertino-based iPhone, due for launch in September. This is speculative but if it turns out true share price will rocket.

I think it's very unlikely that IQE will have a deal directly with Apple. IQE supplies its wafers to various chip manufacturers, who are its customers rather than companies like Apple. My understanding is that Apple's deals are with the chip manufacturers, rather than with wafer manufacturers such as IQE. However, if the rumours about the next iPhone containing lots of VCSELs turn out to be correct, that is likely to mean a lot of extra demand for IQE's VCSEL wafers from the chip manufacturers that do have deals with Apple, and probably eventually from chip manufacturers supplying VCSELs to other mobile phone manufacturers who will want to incorporate similar functionality in their own phones to compete with Apple. This is because IQE has a significant percentage of the outsourced market for VCSEL wafers (i.e. the market supplying those chip manufacturers who do not manufacture their own wafers). There is a lot of recent speculation that the production of VCSEL wafers by IQE has already increased significantly in response to firm orders from various chip manufacturers. Indeed the recent update from IQE mentioned that they have negotiated new premises with the local council on very favourable terms and have ordered expensive new manufacturing equipment, which they probably would not have done if they were not very confident of a big increase in demand for their wafers with firm orders from their customers (the chip manufactuers).

Further to my previous post, here is a link to IQE's recent update:

http://www.iqep.com/media/2017/2017/07/trading-statement-notice-of-results/

ahhh ok thanks for clearing that up pka. that does make more sense.

IQE. Does History Repeat Itself ?

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Ken Lowes

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