IQE

Semiconductor wafer manufacturer IQE was one of the many small caps to post outstanding recovery gains last year and looks well positioned for further, if less impressive, advances.

Up nearly sixfold from a low of 3.38p in February to its recent 20p year high, the Cardiff-based company recently pleased the market with an upbeat year-end update. With clients beginning to refill their inventories in the second half of the year, IQE enjoyed a strong finish to 2009 and anticipates delivering against full year forecasts.

With second half revenues up 45% on the first, and cost cutting earlier in the year combining with its high levels of operational gearing, earnings increased more than threefold and should come in at £8m for the full year. Meanwhile, following a year of strong cash generation, with £4m of debt paid down, the expected year-end net debt figure of £15m is ahead of City forecasts.

IQE’s recovery and future growth is based on the increasing demand for wireless technology and optoelectronics, which both require the sort of compound semiconductor wafers it specialises in. Furthermore, with ‘smartphones’ such as the iPhone and Blackberry using ever more of these products than normal devices and growing particularly fast, the industry outlook is buoyant.

CEO Drew Nelson is also optimistic about progress in developing ‘leading positions’ in such emerging high-growth areas as solar power and solid state lighting. House broker FinnCap naturally agrees, forecasting that 2009’s expected £2.6m and 0.6p of profits and earnings will jump to £4.5m and 1p in 2010.

Although the shares are close to fair value, with IQE well placed to continue growing fast, it could be worth topping up holdings. Add.