Interactive Investor

Why AIM stocks IQE and Churchill China are surging higher

Both companies have struggled recently but share prices have rocketed today. City writer Graeme Evans explains what’s going on.

10th April 2024 15:32

by Graeme Evans from interactive investor

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Flying high 600

Confidence-boosting updates by IQE (LSE:IQE) and Churchill China (LSE:CHH) and a monthly sales record by the “seriously cheap” Treatt (LSE:TET) put the trio among today’s small-cap front runners.

IQE surged 6p to a one-year high of 26p amid further signs that the semiconductor industry is recovering from a cyclical downturn that’s been unprecedented in its extent and duration.

The Cardiff-based firm reported a bigger adjusted loss of £23 million for 2023 but said an trading upturn in the second half had rolled into the first quarter of this year as inventory levels begin to normalise and customer demand improves.

House broker Peel Hunt said IQE had put to rest fears of a lengthy correction, leading to greater confidence in 2024 estimates. It reiterated a price target of 61p and said the AIM-listed company did not deserve a discount to Taiwan epitaxy players such as VPEC.

It added: “Given a very operationally geared business model, we are likely to see profit growth in multiples of revenue growth, just as was the case in the second half of 2023.”

The shares were as high as 170p in 2017, when IQE captured the imagination of retail investors due to its exposure to the iPhone boom.

As well as epi wafers and substrates to successive generations of the consumer mobile market since the early 1990s, the company has enabled wireless and optical communications across the various generations of telecoms network infrastructure.

The shares have since suffered on the back of supply chain challenges, as well as the recent impact of an industry-wide inventory correction. Positioning for the upturn has seen the company accelerate diversification with new customer designs in power electronics and a broader push into the China wireless market.

Chief executive Americo Lemos, who joined from New York-based GlobalFoundries in 2022, said today: “Buoyed by the ongoing industry recovery, IQE is well positioned within the global value chain to deliver sustainable growth and capture opportunities in 2024 and beyond.”

IQE was joined on the AIM risers board by Churchill China after the Stoke-based tableware supplier’s robust annual results raised hopes for an upturn in performance later this year.

A focus on factory efficiency helped to offset the economic headwinds facing its customers in the  hospitality, consumer and retail sectors as profits rose 12.4% to £10.8 million in a year when revenues were broadly unchanged at £82.3 million.

Confidence in the outlook was highlighted by plans to pay a dividend of 25p a share on 17 June, leading to a 14.3% increase in the total for the year to 36p.

Shares rose 90p to 1100p, which compares with 1,640p seen a year ago. Broker Investec has a price target of 1,560p as it expects  further progress on productivity initiatives and notes Churchill has hedged energy costs at more favourable rates for 2024 and into early 2025.

In the FTSE All-Share, Treatt jumped 45p to 449.5p as the supplier of natural extracts and ingredients for the beverage, flavour and fragrance industries reported an acceleration of sales in the second quarter. This included the highest ever monthly revenue in March.

Interim chief executive Ryan Govender called it a robust performance and said he was particularly pleased with progress in China after establishing a broader base of local manufacturing partners. Profits for the half year are set to be marginally stronger at about £7.5 million.

House broker Peel Hunt has a price target of 800p and said the shares were seriously cheap compared with sector leaders and nearest rivals such as Givaudan SA (SIX:GIVN) and Symrise AG (XETRA:SY1).

It added: “The valuation gap between Treatt and peers is at extreme levels, reflecting some caution on short-term trading and UK small-cap discount. This should narrow materially as confidence in  the outlook improves.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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