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Small caps round-up

By Alexander Bueso

Date: Tuesday 13 Nov 2018

(Sharecast News) - IQE reported on Tuesday that its supply chain has been affected by a reduction in shipments from a major semiconductor customer, leading to a drop in full-year revenue expectations.
The AIM-traded wafer supplier to the semiconductor industry, which has supplied components for Apple's iPhone X, said in a statement that it now expects to achieve full year revenues of approximately £160m, up from last year's £154.6m but down on previous expectations. Adjusted EBITDA is likely to come out at around £31m.

Drew Nelson, chief executive of IQE, said a VCSEL inventory overbuild from the end of last year likely satisfied product builds occurring as late as September and October 2018, resulting in a steep ramp for VCSEL production in the fourth quarter with a slowdown in shipments that would "materially impact our expected year end revenues and profitability".

As such, Photonics wafer revenue growth for the full year is now expected to be 11%, down from prior estimates of 35-50%, returning to guided levels of between 40% and 60% in 2019.

"Our Photonics business is building a wide customer base across multiple chip manufacturers providing VCSELs for a number of different end market applications including 3D sensing and this increasing customer diversification will in time produce a better-balanced and more uniformly distributed demand profile," said Nelson.

Nelson added that he was also "delighted" by the performance of the wireless and infrared business units, which are both on track to achieve or outperform full-year revenue expectations.

IQE's shares were up 5.34% at 70.57p at 0924 GMT.

Broker Peel Hunt said the deep cut is a reflection of a very steep year end ramp expected in the prior guidance given the use of inventory overbuild last year even into October.

Reading across to Monday's downgrade from Lumentum, a manufacturer of laser light sources for 3D sensing VCSELs, Peel Hunt added: "One thing Lumentum was keen to reiterate was the absence of market-share shifts. This is comforting."

To the analysts such inventory dislocations "are typical at this juncture of the market evolution" and they "remain convinced we are still at the foothills of the opportunity, and given the share price reaction yesterday, remains positive on IQE's medium to longer-term value upside".

Interserve Group insisted that it still expect a "significant" profit improvement this year, after the government contractor missed a deadline on a joint venture.

The company's shares fell to a 30-year low on Monday and after falling even lower to 27.94p on Tuesday, the company put out a statement to try and reassure investors.

Management insisted that the implementation of chief executive Debbie White's strategy and 'Fit for Growth' transformation programme remain "on track". Interserve said that it "continues to expect a significant operating profit improvement in 2018".

A report from the BBC earlier suggested the company is looking to raise new cash but at least one former investor was sceptical the funds could be secured, even at discounted terms.

Sparking recent concerns, joint venture partner Renewi last week said Interserve had missed a deadline for construction work on an energy-from-waste JV in Derby, though there had been "significant progress" on the plant.

EfW has been an area from which Interserve struggled to complete an exit in the first half of the year, though its said some risks "still remain" as it looks to complete all sites in the second half of the year. Investors worry whether the Derby delay could lead to an additional write-down on that contract and scupper recent progress elsewhere.

At the FTSE-listed company's half-year results in August, White said her transformation plans had already delivered "material cost savings" that were expected to reach £15m this year and should result in a "simpler, more focused and more effective" group. Underlying operating profits of £40.1m were down 29% on the same period last year but up from the £11.5m in the second half of last year.

Interserve completed a refinancing in April, securing committed borrowing facilities of £834m.

Net debt hit £614.3m at the half-year stage, net of £31.5m financing fees that have been deferred, and White expects it to rise to £650-680m in the second half, subject to the timing of asset disposals, but directors said it would improve to £620-630m by the end of 2018.

Analyst Neil Wilson at Markets.com said that comparisons between Interserve and the collapsed Carillion had been all too easy to make, with both diverse businesses operating on thin margins.

"Short sellers have raised their bets - usually a bad sign, but not in itself cause for alarm," Wilson said, noting April's debt refinancing offering some room for manoeuvre despite growing debt.

Wilson said a cash call is "almost certainly a must" but is likely to be highly dilutive for shareholders but took some cheer from considering the government's role.

"[The government] has blood on its hands relating to Carillion and does not want another big failure. A series of large contract wins for Interserve this year are important, not just in juicing earnings but in placing the government in a position where - post-Carillion - it cannot sit back and let IRV fail. One of the big criticisms of government was awarding Carillion contracts that masked its underlying malaise. Ministers would have to carry the can if Interserve fell. In more normal pre-Brexit times it could also bring down the government, post-Carillion."


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