Dreamcast shakes Imagination

Imagination; IQE; KS Biomedix
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The Independent Online

Sega Dreamcast is dead! Long live Sega Dreamcast!

Sega Dreamcast is dead! Long live Sega Dreamcast!

Does Sega's decision to kill off its Dreamcast games console mean game over for Imagination Technologies, the company that designs Sega's graphics chips?

Some investors think so. Imagination's stock crashed 31 per cent yesterday on a profits warning issued just 24 hours after Sega confirmed it was ending production of Dreamcast consoles.

The demise of Sega's console was expected as soon as Sony unveiled plans for Playstation2. However, the technology that powered the console lives on. Sega plans to license Dreamcast chipsets, still based on Imagination's "PowerVR" graphics, to makers of television set-top boxes, PCs, and mobile electronics. Imagination is targeting the same markets for its other intellectual property, including new all-in-one sound and graphics chips.

It is hard to predict whether either will be successful. Microsoft clearly believes consoles are the best way to tap the games market; it launches its Xbox console this year. Meanwhile, PC sales have slowed dramatically - another reason for Imagination's profits warning. Imagination's PC chip partner, ST Microelectronics, trails in graphics technology, although it is aggressively playing catch-up.

The outlook for the set-top box and mobile digital device markets is more encouraging. Pace Micro Technology, the European digital set-top box leader, has struck a deal over PowerVR technology. Regardless of slowing mobile handset sales, growth in other portable digital devices continues apace. Imagination's partner here is the leading semiconductor designer, ARM Holdings.

Still, Imagination will miss profits forecasts for this financial year. And in 2002, UBS Warburg, Imagination's house broker, reckons the loss of royalties on consoles will wipe £6m from Imagination's pre-tax profits, previously expected to be £11.4m. The PC slowdown will add another dent to earnings.

But no one should invest in this stock for the short-term. The shares, at 157.5p and valuing the group at £282m, are back at their level prior to news of the tie-up with ARM last month - arguably a deal with more long-term value than Dreamcast consoles.

Equity Investigator, the research house, reckons the gap in Imagination's near-term earnings will see the shares drift lower in coming months. Offsetting this is the potential for positive newsflow. Hossein Yassaie, Imagination's chief executive, says more deals are in the pipeline. The stock may be speculative, but further weakness in the share price would be a buying opportunity.

IQE

It was open house yesterday at the Cardiff headquarters of IQE, the "semiconductor wafer" group, as it told visiting fund managers exactly what semiconductor wafers are - and precisely why they matter. Back in London, the shares fell 11 per cent in meagre volume.

The fall had nothing to do with anything IQE said. The firm is one of the stock market's most volatile tech stocks, and shareholders are quite accustomed to wild swings in its share price. In fact, Drew Nelson, the chairman, was upbeat.

IQE's wafers are used in the manufacture of superfast chips called compound semiconductors, which are found in DVD players and high-speed modems. The group enjoys more demand than it can meet.

Yesterday, Mr Nelson showcased new manufacturing facilities, churning out wafers at full capacity. Reassuring - IQE'S last quarterly results fell short of expectations due to production problems. Beeson Gregory's analyst returned from Wales comfortable with forecasts of £28.5m in turnover for 2000, rising to some £73m in 2001.

The shares, down 27.5p at 212.5p, value IQE at £345m, or 12 times sales. For a company doubling turnover annually, that's fair. The shares will appeal to investors who don't mind a bumpy ride.

KS Biomedix

Shares in KS Biomedix, the antibody technology group, have held up well despite biotech investors becoming more sceptical of the sector. The group owns technology that can produce human antibodies in genetically engineered sheep - an alternative to the "fully human" antibody technologies associated most commonly with rival Cambridge Antibody Technology.

KS Biomedix's plan is not to license out the technology but to develop drugs in-house. This is a costly affair. Yesterday, interim results showed losses widening 17 per cent, to £1.13m as research and development costs spiralled. While the group revealed a deal with a Singapore antibody manufacturing facility, the shares dipped 16.5p to 596p after the company warned research costs would rise this year as arthritis drugs, for which the group has no partner, enter phase III trials. The shares are too risky.

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