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IQE plunges as it slashes revenue and margin guidance

Short Sellers 2, IQE Management nil. The ramifications of the US government's hostile attitude towards Huawei have been greater than IQE's management expected

Huawei smartphone
IQE is no longer playing down the impact of the Huawei dispute

IQE PLC (LON:IQE), a favourite whipping boy of the Square Mile’s short sellers, has lowered its full-year revenue guidance.

The supplier of advanced wafer products and materials solutions to the semiconductor industry has previously warned of the impact the slumping smartphone market would have on its results and now it has revealed that since then, a number of its chip customers have reduced their forecasts for future orders from the company.

READ IQE plays down impact of Huawei dispute

IQE now expects to deliver revenues in the range of £140mln to £160mln for 2019 at prevailing exchange rates, versus a consensus forecast of £175mln.

Shares in IQE plummeted 30% to 50p on Friday morning. Around 8.6% of the company’s shares in issue have been borrowed from institutions by speculators so they can sell them in the expectation of buying them back cheaper at a later date.

Huawei impact

“This is a larger impact than the previously guided risk related specifically to Huawei, due to the far-reaching impacts on other companies and supply chains that are now becoming evident,” the company said.

Even with the reduction in expected revenues, IQE expects to remain profitable in 2019 but the adjusted operating profit margin is now expected to be significantly below the previous guidance of more than 10%.

The company’s cost base is largely fixed in the short-term but IQE is taking steps to reduce costs and avoid non-critical capital expenditure; this includes the acceleration of the assessment of strategic projects to optimise the company’s global manufacturing footprint.

Stop me if you have heard this before but management remains cautiously optimistic

Despite the cavalcade of calamities that has befallen the company this year, most of which have been outside of its control, IQE remains cautiously optimistic about growth opportunities for 2020.

As global supply chains adjust, IQE expects that the significant market drivers such as 5G, connected devices and light detection and ranging (LIDAR) will regain momentum.

"These are unprecedented times for the global semiconductor industry as geopolitical conditions affect interconnected global supply chains,” said Dr Drew Nelson, the chief executive of IQE.

“It is now clear that the impact of Huawei’s addition to the US Bureau of Industry and Security’s Entity List is having far-reaching and long-lasting impacts on global supply chains. This is a matter outside of IQE’s control but we have responded swiftly to leverage our breadth of relationships and to pursue new sales opportunities. We are also taking prudent expenditure actions in order to manage through this period of uncertainty,” he added.

“IQE remains well placed to adapt to mid – long-term share shifts at both the component (chip) and the OEM level. Indeed, we are now seeing increasing activity from customers in alternative supply chains across our business units as these supply chains respond to current market dynamics. We anticipate significant new customer qualifications during the second half of 2019 as a result. As global markets adjust and recover, we remain extremely well placed for significant future growth," Nelson maintained.

Broker chops estimates

City broker Peel Hunt moved quickly to slash its forecasts on the back of Friday's update, cutting its full-year earnings per share estimate in half.

“With the global handset growth now at risk, and the infrastructure growth hampered by supply chain complications, we move our FY19 revenue forecast to £146.7mln (vs £172.2m previously and IQE’s new guide of £140-160mln) and adj operating margin forecast to 5.1% (vs 10.0% previously),” said analysts in a research note.

“This moves our FY18-21E cc revenue CAGR from 17% to 13%, resulting in a FY19E adjusted EPS cut of 53%.”

They added: “The EPS cut moves our price target to 108p, which is based on the top end of the longer-term sector average P/E.”

--Updates for share price and analyst comment--

Quick facts: IQE PLC

Price: 63.4999 GBX

AIM:IQE
Market: AIM
Market Cap: £508.05 m
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