Imagination Technologies, which designs graphic chips for the likes of Apple, has promised a better second half after a 75% drop in profits.
First half profits fell from £13.2m to £3.3m, reflecting investment in its products, in particular in the MIPS processor business. The company said:
The current financial year represents a transitional year from heavy investment in strategic product lines to a position where the core products are all either generating or moving towards generating revenues.
The group anticipates a much stronger second half financial performance.
The optimism has helped push Imagination’s shares up 22p or 11% to 212p. Analysts at Liberum issued a buy note, saying:
No change to 2015 profit estimates (around £21.5 of adjusted earnings before interest and tax). Some may have feared worse.... The key number for the first half is adjusted earnings before interest and tax of £5m which is ahead of our estimate of £2m and consensus of £4.2m. [There is a] 9% revenue beat in the technology business primarily due to MIPS (400m royalty units versus estimate of 357m) and stronger average royalty rate ($0.145 versus estimate of $0.138).
Licensing revenue increased 11% year on year. Pure [radio] was bad as expected with revenue down 35% year on year with a loss slightly worse than expected.
The one niggle is net debt which is higher than expected (£26.8m versus estimates of £12m) due to a large working capital outflow (Apple ramped iPhone 6 very late in the quarter so receivable saw a significant increase).
Having spoken to management they expect the working capital outflow to unwind in the second half.
Overall, the results are not as bad as some had feared and [we] don’t expected much change to consensus earnings expectations.
Investec analyst Roger Phillips said:
The major news is mid-term EBIT margin guidance of 30%-40%, explicitly given for the first time. In theory this could at least double 2017 EBIT, and so this stock apparently has a bottom-line return story for what feels like the first time.
We retain our hold given testing royalty rate assumptions for H2, but expect a positive short term reaction.
Lee Simpson at Jefferies said:
We still think the current valuation (around 20 times 2016 PE) misrepresents the underlying fundamentals and the opportunities. We see Imagination as an attractive investment opportunity and thus maintain our buy and our 242p price target (based on a forward P/E multiple of 25-30 times). Risks revolve around the success of the MIPS strategy competitive pressures, strength of new products, macro uncertainty and on-going customer design wins.
FinnCap kept its hold rating, and also expressed concern about borrowings. Analysts Lorne Daniel said:
A poor set of Interim results but perhaps not as bad as expected, although the debt level is worrying.
The fall [in revenues] is, as usual, due to the continuing poor performance of Pure (revenues down 34%), but in the technology business, intellectual property licensing is up 11% (royalties being flat).
