Why Shares In IQE plc And Allocate Software PLC Are Rising Today

Today’s small-cap winners are IQE (LSE: IQE) and Allocate Software (LSE:ALL), which have risen 12% and 34% respectively at the time of writing. 

Vote of confidence 

IQE shares have jumped following the news that three of the company’s executives had all acquired large blocks of the company’s shares on Monday. In particular, IQE’s Chief Executive Officer brought 180,000 shares, the Financial Director brought 750,000 shares and the Executive Director brought 750,000 shares. At an average price of 12.75p these purchases amounted to a total of £214,200, an impressive vote of confidence in IQE’s future. 

But these purchases come after a troubled year for IQE. The company’s shares have fallen by more than 40% year to date and are currently trading only just above the 52-week low of 12.50p reached last week. 

However, it seems as if IQE’s directors know exactly what they’re doing. While the group recently reported first-half results that came in below expectations, IQE’s outlook remains unchanged.

Specifically, for the first half IQE reported a pretax loss of £2.3m, compared to profit of £2.5m the previous year. This loss included £4.8m of non-cash exceptionals and £3.1m of restructuring costs. On an adjusted basis, after removing restructuring costs, the group’s pre-tax profit rose by 11% during the period to £5.6m, from £5.1m as reported last year. Adjusted earnings per share increased to 0.86p, from 0.79p.

What’s more, on an adjusted basis, excluding restructuring costs, City analysts expect IQE to report earnings per share of 2.22p this year, which means the company is currently trading at a forward P/E of 6.3. The City has earnings per share growth of 14% pencilled in for next year. 

Cash offer 

As IQE benefits from a surge of insider buying, Allocate Software has jumped after the company’s board recommended a takeover offer from Acorn Bidco Ltd. The bid values the company at around £109.6m, or 153.55p per share, a 35.3% increase on Allocate’s Monday closing price of 113.5p. At time of writing, Allocate’s shares are trading just two pence under the offer price, which indicates that the market believes the deal will go ahead. 

Actually, Bidco has already received acceptances for around 47.1% of Allocate’s issued share capital. It needs at least 75% approval to pass. So, to some extent the deal is already agreed. Nevertheless, I would not rule out another bidder coming in and offering a higher offer.

Indeed, Allocate reported a pre-tax profit of £9.2m last year, which implies that Bidco’s offer is worth 11.8 times historic pre-tax earnings. Based on the fact that many takeovers this year have been agreed at earnings multiples in excess of 15 or 20 times, it looks as if this deal is being done on the cheap, leaving room for another bidder to enter the race.