Wolfson profit woe makes it a tasty target

Published on Monday 27 October 2008 20:29

WOLFSON Microelectronics plunged deeper into takeover territory yesterday after its second profits warning in a month.

The Edinburgh-based semiconductor company warned earlier this month that customers had begun scaling back orders in light of economic uncertainty.

Yesterday it admitted that the situation had deteriorated further.

Wolfson, which had previously forecast sales in the fourth quarter of $45-$50 million, yesterday cut its prediction to $35-$45m. Finance director Mark Cubitt said the company was having difficulty predicting future sales but it was clear that demand was eroding.

"Across the board, across the applications and across most of our customer base they are just getting increasingly cautious," Cubitt said. "This is unprecedented, we've never seen patterns that we're seeing now."

Wolfson makes audio chips used in electronic gadgets and mobile phones, including the Apple iPhone, leaving it exposed to the highly cyclical consumer electronics market.

Despite increasingly frequent warnings from analysts over the prospect of a takeover, Cubitt said yesterday that Wolfson was focused on running efficiently through a difficult market.

He commented: "We're focusing on the things that we can change... our board is focused on a growing, independent future".

But his comments failed to dampen expectations among analysts that Wolfson will become a takeover target.

Jonathan Jackson at Killik Capital said the firm was a good buying opportunity, but based on the low value the market was attributing to it, not prospects for sales growth.

"Buy for strategic value and a takeover by a US rival," he said.

Analysts pointed out that, excluding Wolfson's $89m (57m) cash pile, the value the market was giving the business was around $32.

Semiconductor companies typically carry large cash piles, meaning it would be easy for rivals such as Texas Instruments to pay a healthy premium to the current price and still increase earnings.

Panmure Gordon analyst Nick James said after losing the contract to supply chips for Apple's iPod earlier this year, the market was uncertain whether Wolfson had suffered a one-off slip or was in terminal decline.

While James maintained the company could return to growth, the sudden slowdown in demand for consumer electronics would do nothing for sentiment in the University of Edinburgh spin-out.

"At this point it seems like its going to take quite a long time to demonstrate that Wolfson isn't in longer term decline."

Wolfson yesterday reported a 43 per cent fall in Q3 profits to $8.3m, as sales fell by $9.9m to $60.5m. During the period, Wolfson cut around 20 staff. Cubitt said the company would maintain tight controls over costs, but no further redundancies were planned.