Venture (VMS SP) - Maybank Kim Eng 2016-11-07: Quality of Earnings Rising

Venture (VMS SP) - Maybank Kim Eng 2016-11-07: Quality of Earnings Rising VENTURE CORPORATION LIMITED V03.SI

Venture (VMS SP) - Quality of Earnings Rising


3Q16 outperformed as margins shone; EPS/TP raised 

  • 3Q16 was above our expectation. Net margin was above 6% for three of the past four quarters and for the second quarter in a row. Topline was driven by businesses with more value-creation potential and better margins. 
  • We raise FY16E/17E/18E earnings by 7%/5%/16% to reflect a steady 15% pa EPS growth. 
  • BUY with TP raised 13% from SGD9.75 to a street-high SGD11 as we raise P/E to 15x for FY17E to reflect a 1x PEG.
  • This is still at a slight discount to peers’ 16-17x P/E.


With more value creation comes better margins 

  • 3Q16 revenue/NP rose 2%/17% YoY, following an impressive 3%/20% gain in 2Q16. As 2Q had a SGD3m FX gain, while 3Q did not, the underlying performance was even stronger. 
  • Further, revenue growth of 2% masks the +30% growth of segments with high potential for value-creation, such as Test & Measurement and Life Sciences. 
  • We raise FY16E/17E/18E earnings by 7%/5%/16% mainly on the back of higher margin assumptions. 
  • We think margins have the potential to accelerate further as Venture pursues more high-value business such as these.


Renewed growth augments dividend story 

  • The advent of stronger margins strengthen Venture’s traditional dividend story. Venture’s improved profitability so far has also been accompanied by better cashflow. The improvement is being driven by successfully managing receivables down along with inventory, which traditionally were the biggest cash sops. 
  • We see the potential for dividends to be improved further. We note that Venture used to pay 10% more in dividends that it does now.


Succession plan in place; continuity assured 

  • The growth Venture is now experiencing is certainly the result of the visionary founder/CEO Mr NL Wong, and the efforts of two senior executives who joined >15 years ago who may be in the running as his successor. These two are the EVP of Technology Products & Solutions, Lee Ghai Keen, and EVP of Advanced Manufacturing & Design Solutions, Dharma Nadarajah. 
  • As for Mr Wong’s equity, it will probably be placed in a trust for his children, in our view. It’s unlikely that Venture will be up for sale, unless the buyer’s vision is totally aligned with Mr Wong’s, which we think is a tall order.



Swing Factors


Upside

  • Strength in the 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.

Downside

  • 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/ 2016-11-07
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 11.00 Up 9.750




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