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IQE facing tough conditions as semiconductor sector in crisis


Earlier this year, the UK Government announced what it called a comprehensive strategy to ensure the security of the semiconductor industry in Britain. Semiconductors are essential to the way we live today. They are the ‘brains’ in most of our electronic devices, made from wafers of silicon and core to most of the electronic products we use today from cars, smartphones and kitchen devices to power stations.

Over the past few years a light was shone on the fragile nature of global semiconductor industry when – exasperated by the Covid lockdown and the belligerence of China towards Taiwan, the global leader in semiconductor manufacture – there was a global chip shortage, which among other things caused Apple to delay the launch of its latest iPhone model, a move followed by Samsung, with its latest smartphone model, and caused consternation at car manufacturers, Ford and Nissan who had to delay production.

The new UK strategic plan was marketed as a way to capitalise on what the government believes is the UK’s strength in semiconductor design, research and development, “securing the UK’s position as a global science and technology superpower,” said the government.

Part of the plan is to secure semiconductor supply chains and to develop a solution that will safeguard national security from unfriendly governments looking to hobble technology in the UK, through implanting chips that could affect devices and applications, or squeezing the supply of semiconductors to industry to damage the national economy.

Infrastructure building

The UK government committed GBP1bn over the next ten years to develop the country’s semiconductor infrastructure, fund new R&D and facilitate greater international collaboration. It wasn’t just the UK that was creating semiconductor roadmaps, the US and Japan have also developed national semiconductor plans.

However, the plan was immediately criticised by industry, with some analysts saying that the UK’s financial commitment was tiny in comparison to industrial competitors – the US has committed the equivalent of GBP42bn to its semiconductor business to date, with the EU offering GBP37bn to the trade bloc’s semiconductor businesses – and the government’s political opposition saying that GBP1bn would not even buy one semiconductor fabrication facility.

Part of the semiconductor story in the UK is AIM-listed IQE [LON:IQE] established in 1988 and based in Cardiff, Wales with operations in the US and Taiwan. The company is due to publish its interim results next Tuesday (12th September). IQE’s chief executive, Americo Lemos recently joined the UK Government’s Semiconductor Advisory Panel, which will advise the government on the domestic semiconductor sector, in order to mitigate the risk of supply chain disruptions and protect national security.

Advanced design

IQE manufactures advanced epitaxial semiconductor wafers for a wide range of technology applications for wireless, optoelectronic, electronic and solar devices. IQE specializes in advanced silicon and compound semiconductor materials based on gallium arsenide, indium phosphide, gallium nitride and silicon. The company is the largest independent outsource producer of epiwafers manufactured by metalorganic vapour phase epitaxy (MOCVD), molecular beam epitaxy (MBE) and chemical vapor deposition (CVD).

IQE says its products “deliver powerful enabling technologies that change how we live and work. We understand that in an intelligently connected world, the megatrends of the future will require the advanced performance characteristics of compound semiconductors.”

Challenging conditions

In its last trading update, published in July, IQE said that trading across the group was in line with expectations of management, despite challenging macroeconomic conditions and was on course to deliver GBP52m in 1H23 revenues, which was in line with, but at the bottom-end of previous guidance of GBP50m to GBP56m.

The company has expanded into a range of markets to diversify its revenue streams and mitigate any market slowdowns. New innovations include power electronics and microLED display products, and its R&D developed a number of new products, including a world-first commercially available 200 mm vertical-cavity surface-emitting laser (VCSEL) wafer which it hopes will be attractive to partner fabrication plants globally. The firm is investing in its gallium nitride manufacturing capacity to explore opportunities in electronic display solutions.

In the year to the end of 2022 IQE reported preliminary revenues of GBP167.5m, up 9% from 2021, with adjusted EBITDA of GBP23.4m, up 25% from the previous year. However, losses also widened almost 240% from GBP22.2m to GBP75.4m after adjustments, including the impairment of intangible assets, restructuring costs, CEO recruitment costs and share-based payment charges. Net debt (adjusted) also expanded from GBP5.8m to GBP15.2m year-on-year and as at 31st March was GBP24m.

Management had warned that trading conditions in 2023 would be tough due to the global downturn in the semiconductor industry, Lemos said: “[We] delivered a solid full year performance and improved margins in 2022 despite a challenging industry backdrop […] We remain confident in the strategy we announced […] and are focused on diversifying into high-growth markets such as power electronics and microLED displays.”

In May IQE completed a placement which raised GBP30m before expenses, representing 18.6% of IQE’s share capital and a GBP3m retail offering to meet near-term liquidity requirements and stabilise its balance sheet in light of the sector’s post-Covid slowdown.

The AIM-listed company also extended its USD35m revolver with HSBC to May 2026 to give it some headroom should the slowdown in the semiconductor industry continue. The company made redundancies, reducing labour costs by 10% and cutting PPE capex to reduce overheads by 7% year-on-year.

With the flow of negative news, IQE’s shares have suffered. The company opened trading on 6th September at 16.94p. Share price has fallen from 50.2p at the start of the year by -66.3%. Over one-year, IQE was down -50.3% and the company’s current market cap is GBP165.2m.

Bridgewise recommends investors ‘Hold’ any stock in IQE, however it has been a year since the artificial intelligence stock analysis platform rated the company. The analyst said: “IQE published its 2Q23 report on 6th September 2023 with positive results, but no significant factors particularly remarkable relative to its peers. We do believe, though, that macro-related market conditions will influence the stock’s performance more significantly than its individual results. We therefore gave IQE a total score of 66 out of 100 and a ‘Hold’ recommendation.”

Tough times

IQE undoubtedly is having a tough time. Gloomy forecasts, placement and debt renegotiation does not make for a good look. However, IQE is not without its strengths. The company has a strong track record of innovation and customer service. It is also well-positioned to benefit from the long-term growth of the semiconductor industry, and semiconductors are going to be an essential component in the technological generation we are currently in. Whether IQE keeps flying the British flag is a moot point.

Lemos, who only joined IQE at the start of 2022, and his management team are committed to driving down costs and improving operational efficiency. He learned his trade at Qualcomm, Intel and Texas Instruments. The company has been a market innovator since it produced its first MOCVD wafer in Cardiff in the 1980s. Experimentation with new materials and fabrication processes is helping it diversify into other markets and if it can get over the current bump in the road, given the vital nature of semiconductors in modern life, is well-positioned to be a long-term winner in the industry.

True, IQE has its challenges – and in the current interest rate environment must manage its debt in a smart way – but it is not inconceivable that it will emerge stronger, fitter and leaner, as its problems are not necessarily company-specific, but industry-wide.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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