Imagination rides smartphone wave

The growing demand for smartphones and tablet devices has boosted first half pre-tax profit at Imagination Technologies Group by more than a third, driving up shares in the graphics chip designer by 15 per cent.

The FTSE 250 chipmaker’s market capitalisation has doubled to almost £1.3bn over the past two years on the back of surging demand for its graphics, video and display technologies, which are used in mobile devices including Apple’s iPad and iPhone.

The Hertfordshire-based group extended licensing deals with existing customers including Sony and Samsung, and signed new deals with companies such as Qualcomm, the US wireless chipmaker, and Ricoh, the Japanese imaging group.

“The technologies that we have are very much in demand,” Hossein Yassaie, chief executive, told the Financial Times.

“Four or five years ago there was no smartphone market to speak of. We are now talking about a market of 400m units [a year], and it’s going to rise to about 1.2bn by 2015.”

The group’s technology is now used in 125 chips – up from 98 last year – and a further 54 are in production.

Mr Yassaie said 123m chips containing Imagination’s technology were shipped by customers in the first half, up from 107m in the same period last year.

Revenues from Imagination’s licensing division rose 65 per cent year on year to £19m, while growth was less pronounced at its royalties division, up 26 per cent to £23.6m.

Turnover slipped back slightly to £13.7m at Imagination’s lossmaking Pure digital radio brand, which Mr Yassaie attributed to a “tough retail environment”.

In the six months to October 31 pre-tax profit rose to £10.4m from £7.7m last time, while revenues were up to £56.3m from £44.1m. Diluted earnings per share fell from 4.5p to 2.8p as a result of a one-off tax benefit last year, and there was no dividend. The shares rose by 64p, or 15 per cent, to 501p.

FT Comment

Imagination Technologies has done well to take advantage of the boom in demand for smartphones and tablets, which shows few signs of slowing. However, it is difficult to see how a company trading on a 2012 forward price/earnings ratio of 45 – assuming adjusted earnings per share of 11p – can be considered anything but overpriced, especially when compared with the 18 times p/e ratio of Qualcomm, the US mobile chipmaker. Although investors might feel reassured by Apple’s 10 per cent stake in Imagination, the potential to lose market share in a rapidly evolving sector should not be ignored. Unless investors are betting on a possible takeover, the lofty share price does not adequately reflect these concerns.

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