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Smartphones lift for IQE

Mar 24

Posted by Undercover Columnist in Business, Sidebar Columnist

Advanced wafer products maker IQE saw record second half revenues of £31.2m after rapid de-stocking in the firstSemiconductorhalf. Such a stark turnaround saw a £833,000 first half operating loss become a £3.4m profit between July-December. Net debt was cut from £18.1m to £14.9m, partly thanks to strong cash conversion.

IQE, whose semiconductor wafer products are used in mobile handsets, Wi-Fi and DVDs, among others, has benefited from volume hikes in smartphones as consumers rush for the latest gadget. 3G handsets typically use four or five times the number of Gallium Arsenide chips than the previous generation of handsets, says chief executive Drew Nelson.

IQE will continue to concentrate on high speed wireless communications markets which produce almost 80 per cent of sales and all operating profits. Opportunities in optoelectronics (converting light into electricity) also exist, such as Blu Ray technology and LEDs, while developments in renewable energy, such as ‘green’ CPV solar cells are on the cards.

The semi-conductor market seems to be turning for the better while outsourcing remains a major trend. IQE’s estimated 30 per cent share of an outsourcing market worth $600m (£370m) at the last count is very encouraging.

Panmure Gordon predicts adjusted pre-tax profit of £4.1m and EPS of 0.93p (£3.2m and 0.47p).

Undercover Columnist says:

These results underscore what a well run business IQE is but a 2010 PE just shy of 19 is a hefty rating in spite of the exciting growth potential. After a five-fold share price hike in a year, there’s no obvious catalyst for more in the short term.

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Money meritocracy will rise to the top

Oct 14

Posted by Undercover Columnist in Business

Rats leaving the sinking ship

Rats leaving the sinking ship

Regulators and governments alike have got their fingers crossed that reforms on executive pay will stop bankers going bonkers again. He theory runs that new layers of red tape on pay, bonuses and other incentives will avoid any repeats of banks dragging the entire global economy close to its knees in the way Lehman Bros et al did, but it’s a fool’s hope.

Part of the attraction of a career in high flying finance, and what scares most reasonable people away, is that it is as close to a meritocracy as exists. It’s dog eat dog, sink or swim, there’s little middle ground. Traders trade and, assuming it comes off, hero status is assured, albeit temporarily. Lasso in clients, you’re a winner.

The flip side, of course, is what makes the Square Mile and Wall Street so dangerous. You lose money more than once and you’re out of a job. Just like that. Gone. There is no tenure, no job security. Ten and 20-year careers end in a flash. That’s one reason why so many are paid so well. It’s a bit like combat pay. Survive and prosper, or get out, and if you’re going the firm hopes it happens before you lose it any money. It’s not the post office. It’s trial by fire.

You would think that would make the entire workforce afraid to do anything for fear of being tossed out on their can, back into the cruel, cruel averagely paid world. But a meritocracy works in the opposite way. You have very smart people trying to prove to each other that they are smarter than everyone else. Unlike acing a chemistry exam or even nailing your A-levels, the score is kept with real money – how much of the bonus pool you command for your do-or-die heroics.

home moneyLehman Brothers was a classic Wall Street meritocracy. They wanted to one up Goldman Sachs to win the meritocracy game and get paid in spades. Let’s leverage this sucker up with mortgages. A trillion dollar balance sheet. Hey, if not us, who? When that trade went south, Lehman went bust. You lose money, you’re out. Goodbye. Unless of course the government bails you out.

To prevent the next blow up, the G20 is trying to limit pay and banish risk. But no matter what bureaucrats do, the financial world’s meritocracy of getting paid will live on. They’re going to figure out a way around any new rules. The game might move to hedge funds or some other dark corner of the financial market, but no amount of reform is going to kill this animal instinct.

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Glass ceiling to growth threatens Gunners

Sep 28

Posted by Undercover Columnist in Business, Football

Gloom sets in at the Emirates

Gloom sets in at the Emirates

On the face of it the business of football is in rude health at the Emirates. If anything, Arsenal’s financial performance has outpaced the on-pitch side of things with rising revenues, record match day income and a 25% hike in profits comparing favourably with four straight trophy-less seasons.

So, let the battle of the behind-the-scenes power brokers commence. Unlikely. Strange as it sounds fans have much in common with potential investors since past league and cup successes in football, just like yesterday’s profits in financial markets, should be regarded as no guide to future performance. Buying a stake in the club relies on optimistic assumptions on the clubs ability to continue to generate hefty hikes in profitability and cashflows in the years to come, yet evidence of such potential remains thin on the ground.

For a start, headline revenues have been boosted by the improbable sale of 208 plush apartments at Highbury Square, the clubs listed former stadium. Second, having stripped out this one-off gain, the resulting single-digit growth in overall income was largely because the club played more games than the year before, thanks to semi-finals in both the FA Cup and money-laden Champions League. Combined with a fourth-placed Premier League finish, the chances of significantly bettering this playing performance either this season or in years to come must be considered unlikely.

Also providing a significant cap to future performance is the fact that match day income growth offers very limited upside based on the dubious chances of stadium expansion while the club remains debt laden from building the thing, while season ticket prices are already just about the most expensive in the league.

Yet, like at football clubs across Europe, wage inflation continues to haunt the Arsenal bean counters. Players salaries rose from 101.3 million a year ago to £104 million last year. If this 3% increase seems modest, remember that player wages, for the time being at least, face none of the glass ceilings that the income side of the business does. And imagine what two or three big name signings would do to the figures.

Highbury Square offers best financial bet on Arsenal

Highbury Square offers best financial bet on Arsenal

The club has been supposedly ‘in play’ ever since American sports entrepreneur Stan Kroenke and Uzbek billionaire Alisher Usmanov bought significant stakes in the club. The pair now own 53% between them. But football does not operate in a bubble immune from normal economic pressures.

Arsenal are currently valued at £470 million on the Plus Markets exchange and still burdened by close to £300 million of borrowings, a very full price for even the most frivolous billionaire. They’d be better off buying one of clubs 210 still for-sale flats at Highbury Square, at least their value has fallen in line with the real world.

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Doomed to boom and bust

Sep 25

Posted by Undercover Columnist in Business

Global gathering in Pittsburgh

Global gathering in Pittsburgh

We were promised the end to boom and bust markets and today we’re told that the US wants to hand over a greater share of responsibility for the global economy to many of the emerging Asian powerhouses of the future. Decisions and policy, we’re led to believe, will in future be influenced to a greater extent by the G20 group of nations , including China and India, rather than just the US and a small select wealthy few European nations that constitute the G8.

Does this imply a huge step has been taken towards the new economic world order that was promised by many commentators a year ago in the wake of the damaging collapse of Lehman Brothers and the multi-billion dollar rescue of Merrill Lynch and insurance firm AIG? Some think so. According to Fareed Zakaria, editor of Newsweek International and author of The Post American World, ‘This is the major power shift of the last few centuries,’ he says, speaking to the BBC World Service. ‘For the first time in at least 300 years, you have non-Western actors of a size and scale that will really be dominating the world.’

Yet the obvious new significant player in this stage show is, of course, China. Its emergence as a genuinely new global powerhouse has been in evidence for several years thanks to its vast and cheap labour force. The IMF predicted in February that China’s GDP growth could exceed 6% this year, not quite the double-digit expansion previously witnessed but impressive all the same against the belt-tightening economic backcloth. But a victory for the communist model? Such claims would have Marx and Mao spluttering their party members’ coffee since China remains hopelessly committed to emulating the western capitalist, or Wall Street, model that got us into this mess. The world’s four biggest banks are now all Chinese yet they are also all quoted on the Beijing stock market and operate to the beat of an increasingly western drum.

Inevitable boom and bust

Inevitable boom and bust

The problems that lay at the heart of the global financial and economic collapse are systematic and it will take far more than the introduction of a few stiffened regulations to avoid inevitable repeats. Markets are fundamentally cyclical which means individuals and organisations alike are incentivised to milk the good times while they can. But markets are not the only cyclical factors – businesses, regulators, government and investor mood is too. And just as soon as a sustained up turn is in evidence you can bet your bottom dollar that the cries to loosen the red-tape burden will be loud and wide as business attempts to maximise it position, please investors and line its pockets. This breeds a short-termism and a greed that is as understandable as it is unavoidable, where bubbles balloon on waves of market euphoria only to explode into a recessionary bloodbath.

Former Fed chief Alan Greenspan recently admitted, another financial collapse will happen… it won’t be the same as this one, history never repeats itself exactly, but it will happen. So while regulators, bankers and government desperately fiddle with one lot of parts of the global financial engine in the hope of avoiding a repeat performance, so another future disaster develops in a different part of the machinery.

Market economics is far from perfect and cyclical booms and busts remains the norm, not the exception. Finding a better system remains the challenge but it would be a start for the decisions makers to dig a little deeper for genuine answers rather than merely patching the holes that sank the ship last time round. Until they do, boom and bust will remain as certain as Benjamin Franklin’s death and taxes.

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Water: the future of liquid assets

Sep 23

Posted by Undercover Columnist in Business

Clean water running dry

Clean water running dry

Take any commodity and it can be replaced with something cheaper or greener with a bit of imagination, investment and technical savvy. Plastic pipes are replacing expensive copper ones; wave, wind and sun provide energy in place of coal-fired power stations; corn-based ethanol and fuel cells instead of petrol. Costs may not be immediately comparable, but the invisible hand of the market should address any imbalance in time. Yet arguably the world’s most vital commodity we all take for granted every single day… water.

Water is different since there is no replacement regardless of price yet bizarrely it remains one of the cheapest, in relative terms. Around the world the price of water is usually lower than the cost of providing it.
We are familiar with the investment implications of the imbalance between supply and demand of commodities but the investment case for water-related businesses is even more compelling. On the demand side, population growth is a major problem. It took 10,000 years for the world’s population to grow to one billion, 150 years to double to two billion and in the past 60 years it has risen to three-times that. The global population could be eight billion by 2050.

That increase would be bad enough, but each of us is also using a great deal more water. In America the population has grown roughly 50% in 30 years but its water use has tripled. Other problems include the uneven distribution of water around the world. China, for example, accounts for a fifth of the world’s population but it has just 7% of its renewable water supplies, according to US-based investment manager Summit. Only 10 countries account for 60% of the world’s fresh water.

A huge investment theme to tap

A huge investment theme to tap

Lack of investment in water supply networks is also a huge problem, in both the developed and developing world. About a fifth of the world’s population does not have adequate supplies of drinking water, many more do not even have basic sanitation. Summit believes infrastructure needs in the US alone could cost up to $1,000 billion over the next 20 years.

Put together constrained supply and booming demand and you have the basis for the world’s most compelling long-term investment themes, yet amazingly, it remains a distinctly under-appreciated. Summit’s analysis of the industry and share prices returns shows US water stocks delivered a total return, including re-invested dividends, of over 380% in the 10 years between 1996 and 2006, roughly three-times that of the Dow Jones index. The UK’s own water sector also performed strongly over the same period (although a 2002 UK stock market reshuffle makes direct comparisons difficult). More recently water industry share prices have collapsed in line with the vast majority of UK share prices in spite of their long-term earnings visibility and reliable dividends.

But rather than cherishing this most valuable commodity it is, according to Summit, being allowed to dribble through our fingers at a worrying rate thanks to surface pollution and using ground water supplies faster than they can replenish themselves. Summit reckons overall water levels in China are falling by roughly three metres a year. Basic supply and demand economics have had far reaching effects on most commodities over the past few years, and while there may never be a direct market for water trading, the water industry could easily turn into among the best long-term investment themes yet.

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