Venture Corporation - Maybank Kim Eng 2016-08-08: More Room To Grow

VENTURE CORPORATION LIMITED V03.SI

Venture Corporation (VMS SP) - More Room To Grow

2Q16 was in line with expectations. Continued improvement in revenue mix boosted net margin to management’s long-term target of 6-8%.
Topline was driven by businesses with more value-creation potential and better margins, i.e. Test & Measurement, Life Sciences and Networking, up to 60% of the total pie from 50% previously.

With room for margins to further improve, the stock’s re-rating that started in early 2016 can extend further; maintain our BUY call with a street-high TP of SGD9.75.

2Q16 revenue/NP rose 3.4%/20% YoY. Excluding a SGD3m FX gain that arose from a favourable USD and translation gains from an associate company, core NP rose 14% YoY.
Core net margin improved to 5.8% (excluding FX) on (1) lower opex and (2) better revenue mix.
1H16 revenue & NP came up to 48% of FY16E respectively.
We raise FY16E by 2%, as we think topline and margins have the potential to accelerate as Venture pursues more high-value business.

2Q growth was mostly driven by businesses where Venture has more value-creation potential, such as Test & Measurement and Life Sciences, up 42% YoY to 42% of revenue. If not for temporary M&A-related order disruptions in Printing & Imaging and Computer Peripherals, growth would have been stronger.
Management plans to improve revenue mix disclosures, which should lead to better valuations.

The stock has returned >20% this year (15% stock appreciation + 6% dividend yield). But we still like Venture’s accelerating growth potential from greater capture of customers’ economic value chain through customer-specific R&D.
With peers trading at 16-17x P/Es, we value Venture at 14x FY17 EPS, 1SD to long-term mean. TP is now SGD9.75 (previously SGD9.60).
Including the 5.6% dividend yield, the total 1-year forward return could be another 15%, meriting a BUY.

Strength in US economy, especially in segments that Venture is exposed to.
Continued strength in USD due to Venture’s 100% revenue exposure to this currency.
Faster-than-expected growth in 3D printing, a promising segment that has lagged others such as Life Sciences.

M&As among customers. Acquisitions of Venture’s customers by others could disrupt or discontinue orders.
USD strength may erode competitiveness of Venture’s customers in the global marketplace, lowering orders for Venture.
Increased customer demand for Venture to hold more inventory at major hubbing sites, which would tie down cash that could be used to pay more dividends.

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-08-08

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 9.75 Up 9.600