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Imagination Technologies not short of fans, despite profit warning

Published: 12:06 03 May 2013 BST

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Heavyweight broker Morgan Stanley is keeping the faith with Imagination Technologies (LON:IMG) after the chip designer’s profit warning on Thursday.

Although Imagination put the slide in licensing revenues down to timing issues, Morgan Stanley believes the profit warning indicates a new base level for licences.

“We believe that customers like Renesas, TI and ST-E have invested in wireless in the past five years without getting the returns they were expecting. As a result, we believe they will continue to invest in GPUs [graphics processing units], but at a lower level, as their application processors are more likely to be used in longer cycle products such as automotive infotainment. The race for the latest technology there is less important,” the broker maintains.

On the plus side, Imagination’s customer list remains blue-chip: Apple, Media Tek and Samsung remain the core of Imagination’s royalty stream.

“We expect strong growth from Samsung and MediaTek in the next few years. As such, the 1bn units target in 2016 appears achievable, as we also expect strong growth from MediaTek in emerging markets,” Morgan Stanley said.

Despite keeping the faith and maintaining its ‘overweight’ recommendation, the US broker has cut its earnings per share (EPS) estimates; forecast EPS for the financial year just ended is cut by 23% to 10p from 12.9p, while for the current year the EPS forecast has been slashed to 12,5p from 18.1p.

The price target also gets lopped; it is now 450p, which still leaves around 34% upside.

N+1 Singer has also cut its price target but remains positive on the stock, saying “there were encouraging signs elsewhere in the statement”.

“Enough shipment reports have been received from chip partners to say that royalty rates through H2’13 were maintained at the same level as H1’13, and that unit shipments for the year are likely to exceed 500 units. The pipeline of customer engagement activity is also said to be growing across the whole IP portfolio,” the City broker notes.

N+1 Singer’s target price has been cut to 450p from 625p.

“The shares now trade on 23x Apr’14 earnings (post-SBP) one of the lowest levels of the past five years, and despite EPS growth in the high double digits throughout our forecast period. Taking into account both the medium term story and the additional caution built into near term guidance, we believe that the shares are attractive at this level,” the broker said.

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