IQE, Cardiff Uni and Canaccord bite back at short-sellers
IQE put out a statement on Monday from its joint venture with Cardiff University, defending its accounting practices after they were placed under the microscope last week.
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The JV, called the Compound Semiconductor Centre (CSC), came under scrutiny twice in recent weeks from reports courtesy of US short-sellers ShadowFall and Muddy Waters, with the latter describing the venture’s accounting as "possibly designed to deceive investors".
The two reports have played havoc with IQE's share price, sending the stock 14% lower following ShadowFall’s report on 2 February and then a further 10% on 8 February after Muddy Waters had its say.
Both reports alleged that IQE, which manufactures compound semiconductors for Apple's latest iPhone's 3D camera sensors, has misrepresented its profits, with Muddy Waters claiming that IQE's true profits in the first half of the year were 69% less than it reported after it used CSC to shift losses from its records.
CSC's statement said: "Cardiff University has invested equity of £21.8m in the Compound Semiconductor Centre. IQE contributed their share in hardware, infrastructure and licensing intellectual property, all independently valued. The University entered into the joint venture as a strategic investment to ensure our world leading research has a well-founded route to commercialisation."
Meanwhile, IQE confirmed that it had changed it auditor to KPMG from PWC, who have been in place since 2005, as it seeks to quash the negativity induced by what it referred to as "two recent broadly similar and misleading reports" from funds which both hold a short position in IQE.
In a statement, the technology firm said: "the company wishes to go above and beyond the disclosure requirements as stated under the AIM Rules. The company holds itself to the highest standards of transparency, governance and integrity."
Analyst Paul Morland of Canaccord Genuity visited IQE's facilities in Newport, South Wales on Friday "to confirm the authenticity of the CSC joint venture and walk around the new wafer plant that may be supplying the maker of iPhones this summer".
Morland said the CSS release, together with his own visit to the site, "leaves us fully convinced of CSC's existence, that it has its own employees, an independent board and most importantly, it looks set to be a significant player in the South Wales compound semiconductor cluster that is being enthusiastically supported by the UK government, as it attempts to bring manufacturing jobs back to the UK.
"We also took the opportunity to walk around the new facility for 100 MOCVD machines [that manufacture epiwafers by metalorganic vapour phase epitaxy], equivalent to IQE's total current machine count of over 10 locations globally, just as installation of the first machine was completed.
"IQE states that this plant will be the largest and most modern of its kind anywhere in the world. We believe it is important for investors to understand that it is the mass production of VCSELs and not the license sales made to JVs in 2015 and 2016 that was the principal reason for the strong performance of IQE's shares last year."
Last Monday, analysts at Barclays said they disagreed with the crux of the anonymous Shadowfall short-sellers, which was that a significant portion of IQE’s operating profit was generated due to revenue from these JVs during 2015 and 2016, for fundamentals and the financial reasons.
"From a fundamental point of view, these JVs were not set-up as entities merely to shift funds around to benefit IQE, but rather as links between IQE, academia and other supply chain partners in order to further research and development in the burgeoning field of compound semiconductors.
"In terms of financials, all is disclosed in public documents which have been audited by independent accountants. As a JV partner, IQE participates significantly in the governance of the JVs, but they are separate legal entities, with their own boards and shareholder agreements. The fact that a significant portion of profit came from these two entities in 2015 and 16 is coincidental and does not signal to us anything sinister."
As of 1019 GMT, IQE’s shares had risen 5.37% to 105.90p.