Small Cap Value Report (Tue 13 Nov 2018) - IQE, FOXT, IDEA, BWNG, CAR

Tuesday, Nov 13 2018 by

Good morning, it's Paul here.

To get you started today, I finished off yesterday's report in the evening, with a new section (a reader request) on Northern Bear (LON:NTBR) . Here is the link to that report, if it interests you.

At some point this week, I'm wanting to look at results last week from GAME Digital (LON:GMD) , Tracsis (LON:TRCS) , and £GATC 


Share price: 67p (down 29% yesterday, at close)
No. shares: 776.0m
Market cap: £519.9m

Profit warning yesterday - thank you to the readers who flagged this up in the comments yesterday. This profit warning was issued at 4:20 pm, i.e. just 10 minutes before the market closed to go into the 5 minute closing auction.

I imagine that the share price is likely to continue falling today, because many private investors won't have seen the profit warning in time to take any action in just 10 minutes. It's just not right that profit warnings can be put out during market hours. That creates a false market, and is unfair to ordinary private investors, who get the news later than city insiders who are screen-watching every second of the day.

Rather than issuing a profit warning during market hours, companies should instead be compelled to temporarily suspend a share, then publish the profit warning after hours. Then resume trading at 8 am in the morning, once everyone has had a fair chance to read the announcement.

The news looks pretty bad to me;

IQE plc issues this trading update in response to reports made by a major chip company in the VCSEL supply chain on 12th November 2018 that they had received notice from one of their largest customers for 3D sensing laser diodes to materially reduce shipments for the current quarter.

The Company is currently assessing the impact of this news but at this stage, it expects there will be a material reduction in its financial performance in the current year.

My opinion - I'm keeping away from this share these days, having realised some time ago that I don't really understand the company well enough to be sure either way.…

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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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Foxtons Group plc is a United Kingdom-based company, which operates as an estate agent. The Company and its subsidiaries are engaged in the provision of services to the residential property market in the United Kingdom. It operates through three segments: Sales, Lettings and Mortgage Broking. The Sales segment generates commission on sales of residential property. The Lettings segment earns fees from the letting and management of residential properties and income from interest earned on tenants' deposits. The Mortgage Broking segment receives commission from the arrangement of mortgages and related products under contracts with financial service providers and receives administration fees from clients. The Company offers its residential property sales and lettings services through its network of approximately 60 branches. It offers independent mortgage advice and other related services through Alexander Hall. It offers corporate services, property management and other services. more »

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Ideagen plc is engaged in the development and sale of information management software to businesses in various industries, and the provision of associated professional services and support. The Company is engaged in supplying governance, risk and compliance (GRC) solutions primarily to the healthcare, transport, aerospace and defense, manufacturing and financial services sectors. The Company’s portfolio products include Q-Pulse, Coruson, Pentana Audit, Pentana Performance and PleaseReview. Q-Pulse, which provides quality and safety management. Coruson,which provides cloud-based software solution. Pentana is an auditing software within its internal audit.It has operations in the United Kingdom, European Union, the United States, Middle East and Southeast Asia. more »

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

46 Comments on this Article show/hide all

paraic84 13th Nov '18 27 of 46

How was the gym yesterday Paul? I hope your only bicep curl wasn't picking up a pint at the pub on the way!

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Edward John Canham 13th Nov '18 28 of 46

In reply to post #418499



There are some other forecast numbers from PH and Stifel in the linked FT Alphaville blog (at 11:33) if your interested:-

Not considering getting back in here until at least Dec TU or more likely year-end results (I think the adjustments to statutory profits may be eye-watering).


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Gromley 13th Nov '18 29 of 46

In reply to post #418509

Thanks Phil,

So PH detail there only reiterates what IQE said, the Stifel view is curious though, they reduce their EPS forecasts by 22% this year and 25% next year.

That makes no sense to me , the EBITDA numbers above indicate a much larger decrease this year, but I would expect next year to be less impacted as customer concentration should decrease and presumably Apple will no longer have surplus inventory.

I agree with you though, I've no desire to be involved here now this side of the results.

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Aislabie 13th Nov '18 30 of 46

Orchard Funding (LON:ORCH) (I hold) has reported final results today in a commendably comprehensive RNS.
As a financial microcap it is not part of the SCVR remit but others here may find it of interest.
Before noting a few highlights I would point to the strange position of the Stockrank which - ranked against its European peers - shows as a lowly 31 with a classification as a "Momentum trap". For a stock that has gently declined over the last year and now exists on a modest 12.6 p/e this is hard to figure out. But wait - there's more!
If you change the ranking to rank it against its "Global Peers" than the SR shoots up to a fairly respectable 51 and it is now a sober "Style Neutral"
But wait - there's more!
It is part of the the James Montier Unholy Trinity screen for short selling. I am going to go out on a limb and suggest this is plain bonkers.
Orchard has grown its Revenue (13.4%) and Profit after Tax (12.7%), raised its dividend payout for the year (again) to give a yield of over 3.5%.
Its future includes lower cost borrowing after it gets a banking licence and plenty of headroom in a niche market for insurance premium lending despite two large players in the market.
Bad debt is low, as is debt concentration. The term of the loans is short (mostly 9 months) so rate rises will not leave them unmatched for long.
The RNS gives many other things to consider but the tone is of a company well managed, not carried away by the excess enthusiasm which sometimes affects finance companies, and with a credible long term vision of steady growth.
I may like this company too much so I would appreciate any other thoughts here that might give an alternative view.

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Trident 13th Nov '18 31 of 46

Hi Paul.

Interested in your view of the £Tracsis results of last week.


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Edward John Canham 13th Nov '18 32 of 46

In reply to post #418514

The other thing I've noticed today (I'm pretty UK blinkered) is £LITE (hope that works) which you can have limited info about from Stockopedia - looks a better bet.

Definately one to watch from the sidelines at the moment IMO.

Have fun. Phil

Edit: It didn't work - just put Lumentum in the search.

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barnetpeter 13th Nov '18 33 of 46

Iqe had a sudden fall at approx 4pm. Maybe a big seller. When an institution wants out it will sell at almost any price. I think the ship is sinking myself

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davidjhill 13th Nov '18 34 of 46

In reply to post #418389

Yes but this is utter twaddle in the case of IQE (LON:IQE)

They have spent the year qualifying with 25 OEMs and own 90% of the entire market in these wafers.
Apple, whilst a brilliant brand (I love em), make up a very small proportion of mobile and other device units globally. The size of the "other" plan B market for IQE (LON:IQE) dwarfs anything Apple throw into the mix. The reality is just that they were the first ones ramping up and overstocked and everyone loves an Apple supplier story......up and down!

The company actually spent this year building capacity to service the industry so profits will be lower anyway as Capex was higher and a chunk of this doesn't get amortised. Time spent on OEM certification also costly but only gets done once/

Making these wafers is pretty hard to do and even if you do produce them the level of efficiency/performance is absolutely critical to suppliers. A decent size moat to retain a good market share.

The future use for these wafers and projected market size over next 10 years is huge and has many likely uses over and above smartphones. That said their wireless business is growing at 10% p/a+ at the moment and is twice the size of the photonics business. That's why you see 25% EPS reductions.

With this share I've said all along that 2019 is actually the critical year. This is when the company should see 40% photonics growth that is less lumpy, more diversified and with similar growth levels predicted for 2020 and 2021. If that proves to be the case then the shares will trade a lot higher.

Lumentum's announcement yesterday didn't help and proved a boon to the ultra large short community. Would have been far better if they had met expectations for the year of course. That goes without saying. So at the moment 60-80p range feels about right to me until they show the expected diversified growth levels in 2019. But IQE (LON:IQE) are not dependent on ever increasing iPhone volume growth for this.

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Graham Ford 14th Nov '18 35 of 46

In reply to post #418644

I agree with that David.

From the discourse one would think that Apple are critical to IQE (LON:IQE) success. As you have clearly outlined that is not the case for the VCSEL market and additionally they have other potentially large and growing markets such as 5G communications supporting their future prospects.

So, if one is looking very short term through the lens of Apple, then the picture is not great. However, if one is looking long term at the whole picture the future is bright.

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Roger Lawson 14th Nov '18 36 of 46

Paul: I think the reason for the very low tax charge at Ideagen is the "Enhanced R&D Tax Credit".

Website: Roliscon
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JohnEustace 14th Nov '18 37 of 46

Re IQE (LON:IQE), their competitor Finisair is being acquired by II-VI
"II-VI Incorporated to Acquire Finisar, Creating Transformative Strategic Combination with Leading Positions in Photonics and Compound Semiconductors"

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BlueFrew 14th Nov '18 38 of 46

In reply to post #418749

IQE (LON:IQE) does not compete with Finisar, since Finisar does not make wafers. They are much higher up the value chain than that. The nearest competitor to Finisar, that IQE (LON:IQE) (eventually) sells to, is probably Lumentum. Though Finisar is a bit more vertically integrated than Lumentum.

(No position in any of the stocks mentioned, though I do work for a company where we have some products where we compete with Finisar)

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JohnEustace 14th Nov '18 39 of 46

Finisar buys wafer fab to ramp VCSEL arrays for 3D sensing - Dec 2017
700,000 square-foot facility in Sherman, Texas, will host 6-inch VCSEL wafer production, with CEO Jerry Rawls expecting ‘gigantic’ future demand.

Optoelectronics company Finisar is to expand its VCSEL production capacity dramatically next year, with more than $100 million of investment earmarked for a 6-inch wafer production fab in Sherman, Texas.

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JohnEustace 14th Nov '18 40 of 46

Also from August last year
II-VI buys large UK wafer fab to expand laser production

Additional VCSEL capacity acquired in $80M purchase from Kaiam, which bought the facility just three months ago.
The fast-growing optics and photonics firm II-VI is set for further expansion, with the acquisition of a large compound semiconductor wafer fabrication facility in the north of England.

Pittsburgh-headquartered II-VI announced that it had purchased the 300,000 square foot site, a third of which is a clean room suitable for epiwafer production, from current owner Kaiam for $80 million. It comes just three months after Kaiam had itself acquired the facility from previous owner Compound Photonics.

Capacity grab
The Newton Aycliffe site, originally built by Fujitsu to make memory chips but in fact used mostly by subsequent owners to produce gallium arsenide (GaAs) RF devices for mobile phone power amplifiers, will give II-VI potentially enormous additional capacity for making vertical-cavity surface-emitting lasers (VCSELs).

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Zipmanpeter 14th Nov '18 41 of 46

Re IQE (LON:IQE) - in retrospect, well done to IQE for taking advantage of its higher share price last year to strengthen its financials with a capital raise! This gives it the stability to weather this Apple-driven squall and back its bet on investing in capacity to retain its market share and thus (hopefully) lowest cost position. This could be a brilliant move if the market for 6" VSCELS takes off medium term with a wider range of adoptees - or create a herd of white elephants if not.

Personally, I still believe in IQE (and continue to hold) as a risky mid-term, 3-5 yr opportunity that was always likely to see a lot of volatility hence it my son's JISA !!

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JohnEustace 14th Nov '18 42 of 46

In reply to post #418934

Re IQE, the OEM end customers will always want to have at least two suppliers for security of supply and to allow them to negotiate pricing down, so it's no surprise to see other capacity being put in place.
It just looks to me like the II-VI and Finisair combination, assuming it gets past competition regulators, and once they achieve volume production, will be a strong vertically integrated supply chain and likely to be a preferred supplier.

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BlueFrew 14th Nov '18 43 of 46

In reply to post #418914

That Texas fab is to produce VCSELs. It even says it in the report.

"The CEO added: “In the second half of calendar year 2018, we expect this facility will allow us to produce VCSEL arrays using 6-inch wafers for both consumer and automotive applications.” The company’s fab in Allen produces VCSEL devices on a 4-inch wafer platform."

Who supplies Finisar's wafers (or wafer platform as they also describe it)? Don't know and I doubt they'd tell me.

IQE sell wafers. They sell blank wafers to WinSemi. WinSemi are a fab who use those blank wafers to produce VCSELs to designs by Lumentum.

IQE and Finisar are completely different businesses.

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bobo 14th Nov '18 44 of 46

Carclo has been about to go nuclear with their car lighting division since 1990. Since then nothing. I'd avoid.

Trifast, basically this has no stategic games to play, no moat and frankly can only ever run a marginal business.

I know both companies well. Their independance amazes me. But then who would want companies that are going no where.

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Graham Ford 14th Nov '18 45 of 46

Regarding the articles about the VCSEL market.

These articles confirm the substantial potential in the VCSEL market. Note that the M&A activity doesn’t expand capacity it is just rearranging who owns it. So, this all validates to my mind that there is a bright future for VCSELs and plenty of business for IQE (LON:IQE) regardless of the slow down from Apple.

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Gromley 15th Nov '18 46 of 46

In reply to post #418499

Just a further note on IQE (LON:IQE) Edison have now issued an update they concurr with my view that the EBITDA miss drops straight to the bottom line ( there was no logical reason to assume otherwise)

Year end Revenue (£m) PBT* (£m) EPS* (p) P/E (x)
dec-17 154.5 24.3 3.36 16.7
12/18e 162.5 16.8 1.81 31.1
12/19e 194.8 34.1 3.48 16.2

They drop their forecast for 2019 by a lesser amount, which I also agree with.

This gives a potentially attractive looking forward PE of 16x, however I think that IQE (LON:IQE) will need to actually deliver those numbers before the market believes them.

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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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