IQE PLC — Investment Research Note

Executive summary

IQE is the world's leading independent supplier of compound semiconductor epitaxy wafers (InP, GaN, GaAs, GaSb) used in 5G handsets, wireless infrastructure, 3D sensing, AI/datacom optics and aerospace/defence. Over the past five years the business has swung violently with the semiconductor cycle — from £167m revenue / £23m adj. EBITDA in FY22 to £97m revenue / ~£3m adj. EBITDA in FY25 — and has just completed a transformational £81m strategic fundraise at 19.8p with MACOM as anchor investor following an inconclusive 18-month strategic review 2026-04-27. The single most important point for valuation today is that the post-money share count (1.312bn) and the deeply dilutive 19.8p issue price re-anchor the equity story: the stock has since re-rated to ~32p, leaving little margin for execution slip even as AI-photonics demand inflects.

Fair value estimate

• Methodology: blended forward EV/EBITDA and EV/Revenue, sense-checked against the MACOM strategic-investor price.
• Key assumptions (central case): FY26 revenue £116–120m (>20% growth as guided 2026-04-27); recovery to £150–170m by FY28 on AI-photonics, VCSEL and defence ramps; mid-cycle adj. EBITDA margin 13–15% (vs 14% achieved in FY21 and ~20% pre-2020); 1.312bn shares post-fundraise; ~£15m net debt post-fundraise; 10–12x mid-cycle EBITDA.
  • Low case: £140m FY28 revenue × 11% EBITDA × 10x ≈ £155m EV → ~12p
  • Mid case: £160m revenue × 14% EBITDA × 11x ≈ £246m EV → ~18p
  • Bull case: £190m revenue × 17% EBITDA × 12x ≈ £388m EV → ~28p
• Fair value range: 18p – 30p per share → implied market cap £236m – £394m
• vs current £423.8m / ~32p → absolute downside of approximately –24% to mid-range (~24p)
• Sanity check: MACOM (a strategic industry buyer with a long-term supply agreement) paid 19.8p — a c.58% discount to the prior closing price 2026-04-27. That informed industry price sits near the bottom of our range.

Sector context

• Confirmed as Technology / Semiconductors — a sub-tier "picks and shovels" foundry-style epitaxy supplier.
• Quality/growth profile is below typical semiconductor peers: scaled global epi-wafer presence with genuine technical IP, but loss-making, recurring restructuring charges, heavy goodwill impairments (£62.7m in FY22), and a dilution-heavy capital history.
• Listed peers: Wolfspeed (WOLF, US) in GaN/SiC, AXT (AXTI, US) in InP substrates, II-VI/Coherent (COHR, US) in compound semi components; Aixtron (AIXA, DE) is a key tool supplier (and customer partner).

Investment thesis (3 bullets)

1. Genuine AI-receiver exposure through InP photonics & VCSELs. Q1 2026 commentary explicitly cites "photonics products related to AI-compute and data centre deployments" as a demand driver, with FY26 revenue guided to grow >20% YoY 2026-04-27. H1 2025 already showed InP datacomms strength offsetting wireless weakness 2025-09-23.
2. Strategically endorsed and recapitalised. MACOM's £45m investment (£30m equity + £15m secured CLN), combined with long-term supply agreements (LTSAs) and two board seats, validates the underlying technology platform; the £81m fundraise repays the $35m HSBC RCF and redeems the existing convertibles, materially de-risking the balance sheet 2026-04-27.
3. Powerful operating leverage on recovery. The cost base is largely fixed (capacity-heavy MBE/MOCVD epitaxy across UK/US/Taiwan). Adj. EBITDA swung from £30m on £178m revenue (FY20) to ~£3m on £97m (FY25) 2026-04-27; modest revenue recovery should disproportionately rebuild margin once utilisation normalises.

Key risks (3 bullets)

1. Track record of missing and resetting guidance. FY22 results triggered £62.7m goodwill impairment on Wireless 2022 results; FY23 saw a £29.7m equity placing at 20p; FY25 required £18m CLN in March 2025 then £81m raise April 2026 — repeated capital calls and material dilution 2026-04-27, 2025-09-23.
2. Customer/end-market concentration and cyclicality. Heavy dependence on smartphone VCSEL programmes (chip-size shrinks have repeatedly hit revenue), 5G infrastructure deployment timing, and US DoD funding cycles which slipped from 2025 into 2026 2025-09-23.
3. Governance and dilution overhang. Lombard Odier (16.8%), Artisan (15.8%) and MACOM (11.5%) collectively hold ~44% of the enlarged capital, plus large warrant overhangs (Investor warrants over 75.8m shares; Existing Noteholder warrants over 153.9m shares) 2026-04-27. Further dilution risk if Investor CLN converts.

Operating leverage

The cost base is heavily fixed: depreciation alone was ~£20m in FY24 (£10.6m in H1 2024) and ~£20m annualised in FY25 (£10.1m H1 2025 PP&E depreciation) 2025-09-23, with right-of-use depreciation a further ~£3.8m. Gross margin collapsed from 18.6% (FY20) to 1.2% (H1 2025) as utilisation dropped — the textbook signature of high operating gearing. Wireless adj. EBITDA flipped from £16.2m profit FY24 to £2.3m H1 2025, with capacity utilisation cited as the swing factor 2025-09-23. The H2 2025 trading update confirms the inverse: "improved operating leverage as capacity utilisation improves" delivered EBITDA back into the black 2026-01-12. At ~£97m FY25 revenue producing ~£3m EBITDA, a 20% revenue beat to ~£117m should plausibly drop £8–12m to EBITDA (incremental contribution margin ~40–60% on absorbed fixed costs) — comfortably more than tripling EBITDA. The Taiwan capacity expansion (2021–22 reactor adds) and Pennsylvania/Singapore site closures have raised the floor incremental margin further. The asymmetric inflection point exists; the question is timing and competition.

Value-trap signals

• Two material equity raises and one CLN issue within 36 months — chronic capital indigestion.
• Repeated goodwill impairments (£62.7m FY22 Wireless; £6.8m H1 2025 Photonics).
• Strategic review (Nov 2024 – Apr 2026) failed to find a full-Group buyer despite explicitly inviting bids.
• Going-concern "material uncertainty" language in the H1 2025 interims with covenant waivers from HSBC.
• Multiple CEO transitions: Drew Nelson → Americo Lemos (Jan 2022) → Mark Cubitt (Executive Chair, Oct 2024) → Jutta Meier (current CEO).
• Customer concentration in smartphone VCSEL supply chain has produced recurring revenue cliff-edges.

Earnings vs. expectations

• FY22: Reported revenue £167.5m vs. earlier "low single-digit growth" guidance — broadly met on constant currency but missed by a wide margin in GBP; major goodwill impairment surprise.
• FY23: Pre-close trading update (Jan 2024) confirmed £115m and £3m EBITDA — in line with downgraded guidance but well below FY22.
• FY24: Jan 2025 update flagged £118m revenue / ≥£7.5m EBITDA, exceeding the £115m / ≥£5m Nov 2024 guide — a rare positive surprise 2025-01-23.
• H1 2025: Sep 2025 trading update guided £44m / £(0.4)m vs. earlier analyst range of £130–153m FY revenue — a severe downgrade 2025-09-08.
• FY25: Jan 2026 update placed performance at "upper end" of the £90–100m guidance band 2026-01-12; confirmed at £97m / £3m EBITDA in April 2026 2026-04-27.
• Pattern: more misses and reset-lower-then-meet behaviour than clean beats. The "exceeded" prints in 2024 and 2025 came only after material prior downgrades.

Conviction

Conviction: 2 (low-to-moderate). Anchored by (a) a published profit forecast and recent audited cash position 2026-04-27, (b) a strategic-investor reference price (MACOM at 19.8p), and (c) clearly disclosed segment economics. Limited by (i) extreme cycle sensitivity that makes any mid-cycle EBITDA assumption a wide range, and (ii) repeated material adjustments, impairments and going-concern flags that reduce confidence in run-rate earnings. A different methodology (e.g. replacement-cost asset value of c.£200m PP&E + IP) could land at a similar or somewhat lower number, but with equally wide bands.