Small Cap Value Report (Thu 20 Jul 2017) - IQE, EGS, UCG, BOOM, CARR, MTC, JDG

Thursday, Jul 20 2017 by

Good morning ladies & gentlemen. It's Paul here.

They say that the early bird catches the worm, and that's very true in stock market terms. I wish I could discipline myself to start work properly at 7am each weekday, but I can't. It's usually more likely to be a quick run through a few RNSs on my iPad, then back to sleep.

As luck would have it, I started work today at 5:30am, wanting to get the monthly accounts done for a share club where I'm treasurer. So by 7am I was fully functioning. That was good, as I spotted 2 companies in particular, where some really good news came out, and I was able to buy, or top up, at the opening bell.

So let's start today's report with those 2 companies.


Share price: 97.75p (up 15.0% today)
No. shares: 676.5m
Market cap: £661.3m

(at the time of writing, I hold a long position in this share)

Trading statement - this is a Cardiff-based company which describes itself as;

the leading global supplier of advanced wafer products and wafer services to the semiconductor industry

I've covered this company here before, but have never really understood the sector, or the future potential - I just crunched the historic numbers. Several readers were well ahead of the curve, spotting the opportunity some time ago, and have been rewarded handsomely so far - the share price has risen a remarkable 5-fold in the last year.


Reading its trading update today, I was struck by the comments at the end, which look game-changing to me. In particular this bit;

...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."

We're in a roaring bull market at the moment, so that's exactly the kind of announcement which is likely to put a rocket under a share price. To a certain extent, this is the type of growth situation where…

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IQE plc is a United Kingdom-based holding company. The Company is engaged in the research, development and provision of engineering consultancy services to the compound semiconductor industry. The Company's segments include wireless, photonics, Infra Red and CMOS++. The Company is the manufacturer and supplier of Compound Semiconductor wafers or epiwafers using a process called epitaxy. Its photonics business enables a range of end applications, from data communications and advanced optical-fibers, to sensors in consumer and industrial applications. It operates through business units, including wireless, photonics, InfraRed, CPV (advanced solar), power switching, light emitting diodes (LEDs) and advanced electronics. It produces atomically engineered layers of crystalline materials containing a range of semiconductor materials, such as gallium, arsenic, aluminum, indium and phosphorous. The Company has operations in the United States, Asia and Europe. more »

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eg solutions plc is a back office workforce optimization software company. The Company's software is used in various industry sectors, including financial services, healthcare and utilities. Its principal activity is that of information technology (IT) and software support services business providing improvements in operational management. It uses software packages and an operations management methodology based on production management techniques. It delivers measurable operational improvements in back office environments. The Company provides IT and software support services by operating two companies in the United Kingdom (EGUK) and in South Africa (EGSA). The Company, through its subsidiaries, is engaged in the consultancy and software business. The eg principles of operational management training is designed to coach and support operational and team managers to understand workloads and to balance demand with available resources. more »

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United Carpets Group plc is engaged in carpet and bed retailing. The Company is also involved in franchising of retail outlets. The Company's segments include Franchising and Retail, Warehousing and Property. The Franchising and Retail segment receives income from its franchise activities together with the results of its corporate stores. The Warehousing segment reflects the Company's in-house cutting operation, which services the franchised and corporate stores and a small number of third parties. The Property segment leases properties from third parties and sublets those properties to the store network. Its advice categories include caring for beds, carpet care, caring for flooring and free fitting. The Company offers a range of floor coverings, such as carpet, laminate and vinyl flooring. It offers a range of carpets, such as wool, kids, striped, patterned, berber loop, twist pile and plain. Its backing types include waffle, gel action and felt. It operates approximately 60 stores. more »

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  Is LON:IQE fundamentally strong or weak? Find out More »

72 Comments on this Article show/hide all

pka 21st Jul '17 53 of 72

In reply to post #201223

This web page says IQE has over 100 patents, but doesn't say what they are:

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fwyburd 21st Jul '17 54 of 72

In reply to post #201235

Many thanks. In the Mello presentation he says something similar but I'd like to understand the detail, especially relating to the Epitaxy process on Silicon.

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bestace 21st Jul '17 55 of 72

In reply to post #201263

A search for IQE on Google Patents throws up several items referring to epitaxial structures:

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pka 22nd Jul '17 56 of 72

In reply to post #200983

Hi Luthrin,

You remarked that: "I bought some more IQE shares at the beginning of this month, but not as many as I would have done had Dr Howard Williams (IQE's Operations Director) and Rasmussen himself not sold 1.9m shares apiece at a price of 68.29p on 19 May. Granted, the share price had quadrupled in less than a year and at the time IQE looked overbought, but on the other hand it seemed a curious time to part with such a substantial portion of their shareholdings if IQE's future looked so bright."

I agree it does seems curious. However, Rasmussen did say in the Mello video you linked to that he is risk-averse by nature. Perhaps he and Williams did not want to have too many of their investment eggs in the same basket as their jobs.

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pka 22nd Jul '17 57 of 72

In reply to post #201275

I wonder how important patent protection is in electronic chip manufacture. If a competitor in Taiwan (for example) infringed IQE's patents, would IQE ever know and even if they did would they be able to successfully sue? Another issue is that by applying for a patent, IQE has to reveal its intellectual property to the world.

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Nick Ray 22nd Jul '17 58 of 72

In reply to post #201455

In these kinds of areas it tends to turn into a numbers game. So each big player has a huge number of patents and if you try to challenge them the response is effectively "if you sue us we'll find a patent in our portfolio that you infringe". As a result your best protection against being sued is to have a decent sized portfolio of your own.

Companies generally don't go after others in the space with patent portfolios of their own, but they can go after anyone trying to enter the space without any patents. For example Premaitha Health (LON:NIPT) is currently being sued by Illumina. NIPT have no patents (I think) and Illumina have over a hundred.

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pka 22nd Jul '17 59 of 72

In reply to post #201051

Hi Seadoc,

You might be right to be suspicious of some of IQE's accounting practices. However, the fact that the Welsh and UK governments are supporting initiatives using large amounts of taxpayers' cash for compound semicondctors in Wales, in collaboration with IQE, seems to me to be a very good thing for the company.

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pka 22nd Jul '17 60 of 72

In reply to post #201459

Hi Nick,

Thanks for your very useful comment on patents.

I suppose one of the tricks in applying for patents is not to fully reveal all of one's relevant intellectual property in the application, so the information in the patent application is not enough for a competitor to use.

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JohnEustace 22nd Jul '17 61 of 72

In reply to post #201467

Another point made by Mr. Rasmussen in the PI World video was that the things that IQE do are difficult to replicate even where there is no IP protection, so that their know-how built up over the years is also a competitive moat that for example enabled them to persuade a customer to let IQE take over the customer's in-house operation because the competitor was unable to get their processes to deliver the required yields.

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pka 22nd Jul '17 62 of 72

I agree that's an encouraging point for IQE's future prospects.

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seadoc 24th Jul '17 63 of 72

In reply to post #201463


"However, the fact that the Welsh and UK governments are supporting initiatives using large amounts of taxpayers' cash for compound semicondctors in Wales, in collaboration with IQE, seems to me to be a very good thing for the company."

You are probably right that it is a good thing for the company, but did you mean the shareholders or the directors?


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pka 24th Jul '17 64 of 72

Hi Seadoc,

"You are probably right that it is a good thing for the company, but did you mean the shareholders or the directors?"

I meant the shareholders, but I expect it will be a good thing for the directors too!

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seadoc 24th Jul '17 65 of 72

In reply to post #201615


pks??? Eyesight or fingers?

"I meant the shareholders, but I expect it will be a good thing for the directors too!"

I am sure you are right about the directors and I really hope that extends to the shareholders. Paul is holding so there cannot be anything blatant in the accounts but having sold (sour grapes perhaps?) I still see demons. Seadoc is getting old, grumpy and clearly either half blind or fat fingered, but nonetheless I am still not totally convinced (and no longer holding).

But ATB to holders,


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pka 24th Jul '17 66 of 72

Hi Seadoc,

I agree that IQE is risky and speculative, but from what I've read I think there is a reasonable chance that it might turn out to be a great success over the long-term. The management borrowed money some years ago to make some acquisitions and investments in R&D, which I think have put it into a very good business position for the future in a wide range of potential high-growth markets for 'compound semiconductors'. It's possible that they might have done some slightly dodgy things from an accountancy point of view to make their figures look better when their debt was high (although I have no reason to think that other than what you'd written previously), but their cash flow and debt situation seems to have improved recently, so they may have no need for such tricks in the future. I was persuaded enough by what I'd read to buy a significant number of shares at the high price of 108 pence last Friday, so personally I think it was worth a punt for the long term, even at that high price and its corresponding highish historic PE of about 30. But everyone should do their own research.

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pka 24th Jul '17 67 of 72

In reply to post #201199

Hi Ramridge,

Thanks for your post in which you wrote:

"Below is a screen grab which shows IQE's dominant position in their three primary technologies, wireless, photonics and infrared. There is a wealth of information he provides on this slide. You need to view it for that; it's about 23mn into the presentation."

I think there's tremendous potential for growth in those three primary technologies. But I think there is also enormous potential for exponential growth in their three non-primary technologies, solar, power and CMOS++, although that growth might take longer to really take off. And IQE should be able to use the cash-flow and expertise developed from their primary technologies to put themselves in excellent business positions for their non-primary technologies when growth in those eventually does take off in the future. As Philip Rasmussen pointed out in his hour-long presentation, there are inherent technical limitations on what relatively cheap silicon chips can achieve in those technologies, and there will be technical and economic pressures encouraging the greatly increased use of the more expensive but much more technically advanced compound semiconductors in the future, and as the dominant outsourcing manufacturer of wafers for compound semiconductors at present, I think IQE is in a fantastic position to benefit from these long-term trends for growth. The cash flow and spending needed to fund future technical developments is the main concern, I think, but hopefully IQE's management will be able to cope with that. It's not as if they are a jam-tomorrow company, as they already have good sources of cash revenues and dominant positions in their 3 primary technologies. But everyone should do their own research and draw their own conclusions.

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Paul Scott 25th Jul '17 68 of 72

I don't think IQE (LON:IQE) is risky or speculative. It looks a terrific growth company, with big contracts now coming through. The brokers seem to admit that their forecasts could be way too low (Peel Hunt are explicit about this). It's not particularly expensive on the existing forecasts.

As such, I think it looks a very good risk:reward stock, and I've backed up the truck on this one in recent days.

Regards, Paul.

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pka 25th Jul '17 69 of 72

In reply to post #201787

Hi Paul, out of interest, when you back up the truck, what percentage of your portfolio do you typically load onto it?

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Ramridge 25th Jul '17 70 of 72

In reply to post #201763

Hi pka - Re IQE (LON:IQE)    I bought into this company about a month back following a cursory analysis. Had I done a more thorough analysis I would have bought much more.
Always difficult to draw the right balance between the number of stocks one holds and time available to do in-depth analysis. The usual depth vs breadth dilemma.
The one thing that has been nagging me of late is Rasmussen's and Williams's sale of shares, 1.9m each, on 19/5 @68.29p. I re-read the RNS this morning and the reason they offered was to do with forward retirement planning. The RNS also mentions that their sale was roughly half of their total holdings so they still have serious skin in the game. From their point of view and in hindsight, it was real bad timing  as it looks like they left over 60% of potential gains on the table.

Anyway I have decided to accept their explanation for selling in May as genuine. 

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pka 25th Jul '17 71 of 72

In reply to post #201787

Hi Paul,

You wrote:

"I don't think IQE (LON:IQE) is risky or speculative. It looks a terrific growth company, with big contracts now coming through."

I respect your views on the riskiness of IQE. Stockopedia's risk rating for IQE is 'speculative'. But Stocopedia's risk rating is based on past volatility, and that is not necessarily a good measure of risk for a particular stock. Interestingly, Stockopedia gives IQE's Beta value as 0.6, and some people consider stocks with Beta less than 1 as being less risky than the market as a whole.

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hayashi22 25th Jul '17 72 of 72

In reply to post #201819

The retirement of the two principals is worth thinking about. In this case it does seem as though some thought has been given to timing and hopefully to succession.Anyway it maybe some years ahead.

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 Are LON:IQE's fundamentals sound as an investment? Find out More »

About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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