18 May 2023
IQE proposes £30m placing and £3m retail offer and extends $35m revolving credit facility
Epiwafer and substrate maker IQE plc of Cardiff, Wales, UK has announced a proposed fundraise of about £30m through the issue of new ordinary shares to institutional investors and certain directors of the company, at a price of 20 pence per ordinary share. The firm also intends to conduct a retail offer, open to existing retail investors, of up to £3m in total (the ‘REX retail offer’), at the issue price.
The placing is being conducted via an accelerated bookbuild process that is expected to close no later than 7am (London time) on 18 May, but may be closed earlier or later at the absolute discretion of joint bookrunners Peel Hunt LLP and Numis Securities Ltd.
Applications will be made to the London Stock Exchange for admission of the new ordinary shares to be issued to trading on AIM at 8am on 22 May (pursuant to the placing) and on 23 May (pursuant to the REX retail offer) respectively.
As highlighted in the trading update on 9 March, the semiconductor industry is experiencing a temporary downturn as a result of heightened inventory levels that built up during the pandemic, coupled with softer consumer demand. This has resulted in a reduction in orders and forecasts from IQE’s customers.
Against this backdrop, the firm is proposing to raise £30m via the placing and up to £3m via the REX retail offer in order to ensure that the firm can continue to invest to execute on its strategy, meet its near-term liquidity requirements and deliver a sustainable balance sheet position going forward.
IQE has entered into an agreement with its lending bank HSBC to extend the term of its $35m revolving credit facility (RCF) from April 2024 to May 2026, conditional on completion of the placing, ensuring sufficient headroom in the event that the macroeconomic headwinds persist through second-half 2023.
In light of the challenging market conditions, IQE has implemented several cost control and cash preservation measures, including a 10% reduction in labour costs for fiscal year 2023 and minimization of property, plant & equipment (PP&E) capital expenditure. In total, overheads are forecast to reduce by 7% year-on-year in 2023.
IQE has also prioritized growth CapEx on investment in gallium nitride (GaN) manufacturing capacity. This will enable the firm to diversify into the high-growth markets of power electronics devices (which has a five-year CAGR of 50%) and micro-LED display devices (which has a five-year CAGR of 150%+).
This investment in GaN manufacturing capabilities is reckoned to represent a significant opportunity to gain scale in power electronics, through the purchase of four Aixtron G5+ GaN metal-organic chemical vapor deposition (MOCVD) reactors. The first two of these will be installed at IQE’s existing facility in Massachusetts, and the second two in either the USA or the UK.
The new reactors will be deployed on customer-funded R&D programs initially and will provide incremental margin improvement, diversify the product portfolio, build the resilience of the firm, and reduce customer concentration. IQE has secured preferential delivery and payment terms to stagger this investment across fiscal 2023–2025.
The return on the investment is expected to be incremental to margins and consistent with IQE’s target EBITDA (earnings before interest, tax, depreciation and amortization) margin of >30% set out at the Capital Markets Day in 2022.
IQE says that it has a strong pipeline of strategic and long-term partnerships and new business opportunities that will underpin growth in second-half 2023 and beyond. Despite the current cyclical downturn, the semiconductor industry has consistently demonstrated growth over many decades and the fundraising is expected to ensure that the firm remains well positioned to capitalize on the significant opportunities ahead.
Net debt rises to £24m
In its unaudited preliminary results, IQE has reported annual revenue growth of 9% from £154.1m in 2021 to £167.5m for 2022, or £151.2m on a constant-currency basis.
Impairment of goodwill was £62.7m, relating to the firm’s wireless operating segment, where reductions in sales volumes — linked principally to lower levels of smartphone-related demand and continuing weakness in 5G infrastructure — is forecast to result in lower levels of capacity utilization and operating segment profitability. The non-cash impairment results from the near-term softness in forecasts for wireless products as a result of the industry-wide semiconductor downturn, driven by inventory build-up throughout the supply chain.
Due primarily to the non-cash impairment of goodwill of £62.7m, operating loss has risen from £20m to £73m. However, adjusted operating loss (excluding the impairment) has been cut from £6.5m to £3.6m.
Net cash flow from operations has more than halved from £18.9m to £8.9m, reflecting cash generated through IQE’s resilient trading performance offset by adverse working capital movements and the cash impact of adjusted non-operational items.
Adjusted net debt (excluding lease liabilities) rose from £5.8m to £15.2m during 2022. By end-March, net debt was £24m.
First-half revenue to be down by £30m, but rebound expected in second-half 2023
IQE says that current trading is affected by the temporary semiconductor industry downturn, with reduced customer forecasts, orders and associated revenue.
First-half 2023 revenue is expected to be £50–56m (down on first-half 2022’s £86.2m). However, full-year 2023 revenue should be in line with management expectations set out in March, which include a return to year-on-year growth during second-half 2023.
Diversification into the high-growth markets of power electronics and micro-LED displays targets GaN growth opportunities in 2024 and beyond.
IQE expects PP&E CapEx related to essential maintenance and health & safety items and existing commitments to be about £7.4m in full-year 2023. In addition, the diversification strategy will lead to investment in GaN of about £8.3m.
“Our industry is currently experiencing a downturn cycle but it has demonstrated consistent growth over many decades, which is forecasted to continue,” says CEO Americo Lemos. “As macro technology trends drive an increased need for compound semiconductors, IQE is strategically positioned to serve the global market and underpin the next wave of innovation,” he adds. “This fundraise enables our investment in new growth markets including power electronics and micro-LED display, in line with our strategy. As a result, we are well-placed to capitalise on our excellent pipeline and global footprint as we emerge from the current cycle.”