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Imagination Technologies – trading, Apple & strategic review update not exactly promising

By Steve Moore | Thursday 4 May 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

I previously commented on Imagination Technologies (IMG) a month ago in the aftermath of a “Discussions with Apple regarding license agreement” announcement – on which I noted that the company had rather been “notified” and “asserted” to than in “Discussions with” and that it looked to be daunting organisational upheaval ahoy for it to attempt to achieve a sustainable future. There is now a “Trading and Apple update, planned sale of units” announcement.

This includes that;
“Imagination has been unable to make satisfactory progress with Apple to date regarding alternative commercial arrangements for the current licence and royalty agreement. Imagination has therefore commenced the dispute resolution procedure under the licence agreement with a view to reaching an agreement through a more structured process. Imagination has reserved all its rights in respect of Apple's unauthorised use of Imagination's confidential information and Imagination's intellectual property rights.”

Hmmm, not exactly promising, whilst it is added that since the 3rd April “Discussions with Apple” announcement, “the board has reviewed the composition of the business”. This has now led it to “actively market” its MIPS (embedded processor-focussed) and Ensigma (IP for low power device connectivity) businesses for sale.

This is stated to be in order to “concentrate its resources on PowerVR and strengthen Imagination's balance sheet”, with it considering its ‘PowerVR’ technology “with continued investment… to be well placed in mobile, automotive, digital TV/set top boxes and the rapidly emerging AR/VR market and having the potential to exploit investments for artificial intelligence in the medium-term”.

Overall trading is noted to have been “in line with the board's expectations”, but the share price reaction shows it is the future which is of concern. Brokerage N+1 Singer notes that both assets for sale are loss-making and that Imagination is not selling from a strong position, but that it expects the group to be able to sell them – though likely at a level ‘broadly covering’ the group’s current net debt position.

Singer concludes; “with an acceptable resolution with Apple far from certain Imagination remains in a very difficult position and we retain our Sell recommendation”. This chimes with my previous conclusion and this currently remains firmly on my bargepole list.

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