Sunday, September 25, 2011


CTN - Clearstream Tech

Regular readers will know that my CTN was a growth company where there was a recent takeover announcement. It was a high-growth company that I was able to obtain at a very reasonable price.  The original idea wasn't my own - I copied it from a suggestion on Motley Fool. I liked the story very much, and thought it worth a punt. Maybe I just got lucky, or was able to recognise someone's superior idea. Growth investing is not really my "style". I tend towards low PE stocks. However, I was becoming frustrated with that, because a lot of low PE stocks are quite boring. I wanted to try my hand at a bit of growth investing.

I had tried to do a bit of growth investing about 10 years ago. I think the company was Real Time Control - although I could be wrong. Maybe I am getting it mixed up with another company, that made some kind of equipment, and it went bankrupt. Anyway, the company I invested in didn't. It made electronic cash registers, and did some back-end processing, or something. I remember seeing one in a Happy Eater, would you believe. The company was tipped in Investor Chronicle. I liked the story, so I bought. Within a few months of my purchase, the company was taken over. I'll put that down to coincidence, though.

So 10 years passed since I made my first growth company purchase until my next try. They're quite risky, of course; and volatile. Looking in the rear-view mirror can often be an unappetising experience, as the company may well have made a succession of losses. So they definitely wont appeal to those who take a more traditional Graham or Buffett approach.

Since CTN is going to be taken out of the game, I thought it would be a good opportunity to hunt around for some other growth companies. I'll be doing this on an irregular basis. They're not "recommendations", you understand, merely explorations of what's out there and what might or might not be interesting. Let's start ...

IQE make semiconductors:
  • wireless - these are wafer products that customes use to make RF chips for all sorts of wireless and satellite communications
  • optoelectronics - devices that convert electricity into lights (lasers, LEDs, etc.) and vice versa (fiber optica, solar power)
  • and electronics.
IQE has a market cap of  134m, and a PER of 14.8. It has net cash of 1m, negative gearing, both tangible or otherwise, and a z-score of 3.7. It is trading on an EV/EBITDA od 10.2 - which is probably about the market average.

What I think is interesting is that the company seems now to be taking off. It was making operating losses until 2006. It made an operating profit of 0.6m in 2007, it it's up to 7.2m in 2010. Operating margins are increasing very nicely. So it seems that the company is getting "critical mass" as it moves from some kind of "experimental" stage to actually producing something.

On 14-Jul-2011, IQE gave a trading update:
Continued growth in revenues and profitability ... The outlook for the second half remains upbeat. The Board expects continuing robust growth in the Group's core wireless and optoelectronics businesses, as demand for both industrial and consumer end user devices containing IQE products remain strong.  This confidence is strengthened by the continued progress being made in new product developments and qualifications. ... The prospects for the Group are very exciting and, with our highly geared business model, provide the Board with considerable confidence in a continued improvement in financial performance for the second half.

On 24-Aug-2011, IQE announced the appointment of Norio Hayafuji as Head of Sales and Marketing for the Asia Pacific region:
We confidently expect China, Taiwan, Korea and Japan to become major global powers in emerging technologies over the next decade. We already have a considerable presence in the Far East with a solid customer base and state-of-the-art manufacturing facility. The appointment of an acknowledged industry expert with extensive knowledge and experience of our industry in the region will help ensure that IQE is well positioned to exploit this growth potential.

The announcement also details some of the rationale as to why you'd want to invest in IQE:
IQE is the leading global supplier of advanced semiconductor wafers with
products that cover a diverse range of applications, supported by an innovative
outsourced foundry services portfolio that allows the Group to provide a 'one
stop shop' for the wafer needs of the world's leading semiconductor

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, ultra
high brightness LEDs, a variety of advanced silicon based systems and high
efficiency concentrator photovoltaic (CPV) solar cells.

The manufacturers of these chips are increasingly seeking to outsource wafer
production to specialist foundries such as IQE in order to reduce overall wafer
costs and accelerate time to market.

IQE also provides bespoke R&D services to deliver customised materials for
specific applications and offers specialist technical staff to manufacture to
specification either at its own facilities or on the customer's own sites. The
Group is also able to leverage its global purchasing volumes to reduce the cost
of raw materials. In this way IQE's outsourced services, provide compelling
benefits in terms of flexibility and predictability of cost, thereby
significantly reducing operating risk.

IQE operates a number of global manufacturing and R&D facilities: Cardiff,
Milton Keynes and Bath in the United Kingdom; Bethlehem, Pennsylvania, Somerset,
New Jersey and Spokane, Washington in the USA; and Singapore. The Group also has
11 sales offices located in major economic centres worldwide.
This company reminds me of CTN, where the story is building.

 On 07-Sep-2011 IQE reported:
Continued growth momentum in smartphone market ... revenues up 15% ... EBITDA up 13% ... adjusted EPS up 20% ... Wireless  growth driven by continued strong adoption of smartphone and other mobile computing devices ... Significant growth in opto-electronics ... Several patent applications ... Continued  investment  in  further  production  capacity
It must be remembered that IQE has fallen quite a lot in share price since  Feb 2011 - in fact, it's halved. I attribute this to a share price that was probably ahead of itself at that time, coupled with overall swingeing declines in the stock market since then. The following statement in their report was also highly likely to be a contributing factor:
Our overall upbeat outlook is tempered by recent growing uncertainty in the global economy. This has the potential to impact inventory levels downstream in the supply chain or of individual customers although we have not seen any evidence of this at this time.
Despite this, my view on IQE is very positive. I think that there's always something to worry about, and to some extent, one has to go into this kind of thing knowing that it's a question of probabilities, not of certainties. Not everything you try will work out. IQE has a beta of 1.28 - so expect it to be very volatile.

Some points expressed on the BBs:
  • economic headwinds are a worry.
  • possible takeover candidate. IQE is trading at a discount to the sector, which could tempt potential bidders.
  • great explanation of IQE's "epitaxial expertise" by "Babbler2" io LSE: normal silicon wafers only have a single film of properties. IQE has developed a "compound gallium arsenide substrate technolody" that allows several films to be layered on. This allows it to be faster, more powerful, and complete many tasks at once.
  • The epitaxial wafer could sit at the heart of many transformational tech trends: superfast active optical cabling, energy-efficient LEDs, lasers for next-gen comms and entertainment, and electricity transmission from solar panels.
  • sales to mobile phones account for about 75% of turnover, with the rest going to various unproven technologies. So it should best be viewed as an established wafer manufacturer with a couple of outside high-tech bets on the side. This gives IQE a speculative component.
  • IQE is the industry's largest epitaxial foundry, with an estimated market share of over 30% - almost twice the size of its nearest competitor
  • Apple is poised to sell as many as 27m iPhone smartphones in 2011Q3 and 40m in 2011Q4 following the launch of its next-gen iPhone handset.
  • (speculative) potential that optical interconnects could replace copper cables. Over 2bn USB cables were sold last year
  • potential for pico projectors (miniature laser projectors). They emit primary colours as opposed to white light, giving them a focus whether they are project from 6" or 6'. Poster sees potential to disrupt encumbent tech in this area. One of IQE's subsidiaries was granted patent protection for this in 2010.
  • company has substantial tax losses to bring forward
Directors own about £8m worth of shares, against a market cap of 133m. I'd say that they had significant skin in the game - although the bulk of it (7m) is in the hands of just one director.

I think you'll find that that's my 10 minutes well and truly up.

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