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IQE Plc

IQE is one of the leading suppliers of semiconductor wafer products for wireless and optoelectronic components, photovoltaics and silicon based epitaxy. IQE uses advanced crystal growth technology (epitaxy) to manufacture and supply bespoke semiconductor wafers (‘epi-wafers’) to the major chip manufacturing companies, who then use these wafers to make the chips which form the key components of virtually all high technology systems. IQE is unique in being able to supply wafers using all of the leading crystal growth technology platforms.

IQE’s products are found in many leading-edge consumer, communication, computing and industrial applications, including a complete range of wafer products for the wireless industry, such as mobile handsets and wireless infrastructure, Wi-Fi, WiMAX, base stations, GPS, and satellite communications; optical communications, optical storage (CD, DVD), laser optical mouse, laser printers & photocopiers, thermal imagers, leading-edge medical products, barcode, high efficiency LEDs and a variety of advanced silicon based systems. The demand for the supply of compound semiconductors has seen rapid growth, fuelled largely by the increasing demand for feature rich handsets and smartphones.

One of the main buzz words, or phrases rather, this year has been “The Internet of Things.” Just like cloud computing and mobile banking & payments have been hot topics over the last couple of years, 2014 has been widely tipped as the year for “The Internet of Things” with big players such as Google, Microsoft and Apple making big moves in this arena. Microsoft teamed up with Insteon to offer smart-home kits, whilst Apple announced HomeKit, and Google made the biggest move by acquiring Nest Learning Thermostat for a staggering $3.2 billion. As more appliances and devices become “smart”, they will require chips to do so, and also wireless chips to become “connected.” With increased investment in the sector and products advancing in the marketplace, we expect IQE to benefit after establishing a great position in the market and hope to see good things from them in the future.

Moving on to the numbers, as always we take a look at the fundamentals and they do look attractive at the current price of 22.5p which gives us a market cap of c£150m. For the accounts to 31 Dec 2013, revenues were £126.77m with a pre-tax profit of £13m, EPS 2.09p putting it on a current PE of 10.8. Going forward, this year to 31 Dec 2014, revenues are expected to be roughly the same at around £125m, pre-tax profit of £14m with EPS at 2.22p (+6% growth) producing a 2014 forward PE of 10.1. To 31 Dec 2015, revenues are expected to be £129m with £16.6m pre-tax profit and EPS growth of 14% to 2.52p giving a PE of just 8.8. Not exactly mind-blowing growth in numbers but solid none-the-less and it only takes a new deal or contract to cause an upgrade to those forecasts. With a 2015 forward PE of 8.9, the stock is cheap, we would expect to see a PE of around 15 on a stock like this. If you take into consideration a hugely popular stock like ARM Holdings, it is trading on a 2015 PE of just over 30, with IQE on just 8.9, you could fairly claim that this is cheap. Just touching on the balance sheet briefly, assets increased £33m with liabilities increasing £11m providing an increase in Net Assets of £22m, standing at £112m at 31 Dec 2013, this calculates to a Price to Book ratio of 1.34.

In conclusion, we see IQE as a buy at 22.5p with an initial target of 27.5p and fair value in the region of 35p. The undeniable and expected increase in the market for “The Internet of Things” should only bode well for IQE and based on the fundamental value metrics above, now looks to be a good time to take a position.

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