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Imagination Technologies turns the corner

The company that designs chips used in smartphones produced by fruitily named companies (and others) has turned a corner after a torrid 18 months, claims broker Investec.
Imagination Technologies turns the corner

Chip designer Imagination Technologies (LON:IMG) said it still expects to achieve licensing revenue growth of 10% this year despite currency headwinds.

In an update on trading since the beginning of May, the company said licensing activity in the period has been good with encouraging levels of activity across all three of its main intellectual property (IP) product areas and across the broad customer base.

Royalty revenue for the April-June quarter, meanwhile, was in line with management’s expectations, reflecting both growth from a number of partners as well as the short term impact from known product transitions with other partners this year.

Pure, the group’s digital audio broadcasting (DAB) unit and the runt of the Imagination Technologies litter, is also trading in line with expectations.

Both licensing and royalty revenue have been affected by the strength of sterling in the period, the company said, and the company continues to actively hedge against adverse foreign exchange movements.

Broker Investec said the results give the impression of Imagination having turned the corner after a tough 18 months, but it notes that “while iPhone 6, the Apple Watch (possibly) and share (re)gain in Mediatek should drive improvement, a +£100m swing from H1 to H2 looks a tough ask”. Accordingly, the broker has cut its price target from 250p to 220p while retaining its ‘hold’ recommendation.

JP Morgan sticks with its ‘overweight’ recommendation and 275p price target, and thinks earnings could be driven by gains in market share in the low-end smartphone market.

Finance house Killik notes the seasonality of royalty revenues and the normal weighting of licensing revenues typically results in a stronger financial performance in the second half, and what with new product launches such as the Apple iPhone 6, this effect will be more pronounced this year.

“With the good trading results, as well as expected positive news flow around new product launches containing Imagination IP, we would expect investor sentiment towards the stock to continue to improve and consensus numbers to move closer to the company’s one billion unit target for 2017.

“Over the longer term, Imagination offers good exposure to the significant growth expected in the connected home and the Internet of Things, which could drive significant shipments of both processing and communications IP,” Killik said.

Shares were up 4.6% at 197.7p in late morning trading.

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Imagination Technologies Group Timeline

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