Numis downgrades Imagination Technologies despite H1 outperformance

Numis Securities is recommending investors to sell shares of Imagination Technologies Group (IMG) despite the chip group beating the market’s forecasts with its first-half results, saying that its concerns about the business still remain.

The broker lowered its rating from ‘reduce’ to ‘sell’, saying recent optimism surrounding a potential earnings recovery “is likely to fade again”.

“Despite an out-performance against ours and consensus expectations, the first-half performance does not assuage our concerns on IMG,” said analyst Nick James.

He said that although Tuesday’s interim report beat forecasts, the results still showed a 4% decline in revenues and a 60% drop in profits, as well as a significant fall in non-Apple royalty units excluding MIPS.

“The lead indicator of licensing revenue remains at levels well below where we would expect given the massive investment in opex over the past five years,” James said.

“This seems to run quite contrary to the ebullient talk of an increased addressable market and engagement across the IP product portfolio. Rather it suggests to us that the revenue potential from new IP is significantly lower than for the early generation of graphics.”

He added that IMG used to be a market leader in mobile graphics but has now been resigned to be increasingly reliant on Apple.

The company had initially impressed by forecasting medium- and long-term operating margins in the range of 30-40%, but James said this guidance “lacks credibility”.

The analysts said that the stock trades at 54 and 28 times earnings for the years ending April 2015 and 2016, respectively, so “risk feels heavily weighted to the downside”.

The stock was 0.9% lower at 228p by 11:07, well above Numis’ 170p target price.