February 5, 2018 / 2:59 PM / 19 days ago

UPDATE 1-IQE says hedge fund report "without merit" as shares fall

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By Paul Sandle and Alasdair Pal

LONDON, Feb 5 (Reuters) - British semiconductor material maker IQE, whose technology is in Apple’s iPhone, said a critical analysis of its finances by ShadowFall, a hedge fund manager with a short position on its stock, was “without merit”.

IQE shares, which have risen more than six-fold since mid-2016 as investors bet it could benefit from its Apple relationship, fell more than 10 percent in early trading on Monday before clawing back some of the losses to trade down 3.1 percent at 1420 GMT.

ShadowFall Capital & Research, which says it uses publicly available information, said in a report published late on Friday that it was concerned about two of IQE’s joint ventures set up with universities in Wales and Singapore, that together provided around a third of IQE’s earnings in 2015 and 2016.

It also raised concerns about a series of related party transactions that it said appeared to be “somewhat circular”.

IQE, which has a market capitalisation of nearly 800 million pounds ($1.1 billion), said the allegations in the ShadowFall report were “without merit and provided a misleading analysis of the company’s financial position”.

“The central thesis of this report is a fundamental misrepresentation of the profit and cash generation of IQE, especially with respect to the company’s joint venture agreements,” it said.

It reiterated its outlook from December, when it said it expected its full-year revenue to be ahead of market forecasts and to be not less than 150 million pounds for the year.

Matthew Earl, ShadowFall’s founder, said in a statement emailed to Reuters on Monday that IQE had not addressed a number of its concerns in its response, including why the joint venture with Cardiff University in Wales had lent IQE money in 2016.

IQE, which said it its statement to the London Stock Exchange that ShadowFall made no attempt to review its report with IQE prior to its publication, did not respond to further requests for comment.

INVESTORS SPLIT

Cardiff-based IQE produces around 80 percent of the global supply of outsourced “epi-wafers” which are used in the iPhone X’s 3D-sensing camera.

It has polarised investor opinion in recent months, with many retail investors backing the stock and the majority of analysts covering the company recommend buying its shares while some of the world’s largest hedge funds are betting its price will fall by “shorting” the stock.

Analysts at Barclays said on Monday there was “neither news nor merit” in the ShadowFall report on the joint ventures, and reiterated its “overweight” view.

“The fact that a significant portion of profit came from these two entities in 2015 and 2016 is coincidental and does not signal to us anything sinister,” the analysts said.

However, seven hedge funds have short positions totalling 11.7 percent of the company’s shares, a ten-fold increase since July and making IQE one of the most-shorted stocks in Britain.

The two joint ventures mentioned in ShadowFall’s report are part of the reason for this sudden increase, sources familiar with two of the seven funds told Reuters on Jan. 30.

IQE’s shares have fallen by more than 25 percent since the start of 2018. ($1 = 0.7141 pounds)

Reporting by Paul Sandle and Alasdair Pal; editing by Louise Heavens and Alexander Smith

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