Venture Corporation (VMS SP) - 4Q16 Earnings Stronger, Dividend Flat
- Venture’s 4Q16 results were above expectations.
- Revenue growth accelerated to 23.1% yoy while gross margin improved 1.7ppt yoy to 23.1%. Revenue mix continues to shift towards the high-margin test and measurement/medical segment.
- Final dividend remains unchanged at 50 S cents/share.
- Re-iterate BUY with a higher target price of S$12.40.
- Venture reported a net profit of S$54.1m for 4Q16 (+20.6% yoy), higher than our forecast of S$47.4m.
Test & measurement/medical dominates.
- Revenue growth has accelerated to 23.1% yoy, driven by expansion in the test and measurement/medical (+64.2% yoy, +28.4% qoq) segment. Venture benefitted from:
- a favourable shift towards the high-margin test and measurement/medical segment, which accounted for 46.7% of revenue (4Q15: 35.0%), and
- the ramp-up in production for Illumina’s new series of genome sequencer, which drastically reduced the time and cost of having one’s DNA decoded.
- Venture also executed well for test and measurement products delivered to Keysight and Waters.
- Networking and communications segment’s net profit also grew by a healthy 22.3% yoy.
- Venture will be changing the classification for segmental breakdown of revenue. Starting from 1Q17, its revenue will be broken down into three segments based on eco-systems.
Margin expansion from improved product mix.
- Gross margin expanded by 1.7ppt yoy to 23.1%. Staff costs increased 8% yoy as Venture invested in and rewarded its engineering talents. Depreciation and amortisation increased 26.3% yoy. Net margin was stable at 6.3%.
Improved net cash position.
- Venture’s net cash position has increased 25.6% yoy to S$407.1m or S$1.46/share. Operating cash flow was stable at S$231.3m in 2016.
Drag from legal dispute.
- The results included an accrual for legal settlement cost of S$22.6m. The one-off item was due to dispute with a customer concerning joint development of a specialised product. This is a full and final settlement with the customer on a confidential basis.
- Venture focuses on value creation, ie the relentless pursuit to analyse every segment of the value chain and how best to add value to customers. The emphasis is on generating value for customers and helping them achieve their business objectives, so as to reap rewards with more business and sustainable margins.
- Venture utilises Kaizen and lean manufacturing to enhance cost efficiency and ensure a culture of continuous improvement.
Winning through collaborative partnerships.
- Venture is working on new complementary and collaborative alliances with industry leaders. It continues to deepen its partnerships with leaders in the technology domain of its interest, such as test and measurement, medical/life sciences and fibre optics.
- The shift towards test and measurement and medical/life science products, which are seeing wider applications in food safety, environmental analysis and medical diagnostics, would have a positive impact on margins.
Dividend stays flat.
- Venture has declared final dividend of 50 S cents for 2016, unchanged compared to 2015. Its payout ratio at 75.9% and dividend yield at 5.3% is above market average. Venture has provided attractive total return with the stock gaining 19.9% in 2016 and 4.5% ytd in 2017.
- We believe management is conservative and wants its dividends to be sustainable.
- Uncertainty has increased due to the Trump Administration’s policy toward international trade.
- We have raised our existing earnings forecasts for 2017/18 by +12.6%/+14% due to the sustainable improvement in margins.
- Maintain BUY. Our target price for Venture of S$12.40 is based on 2017F PE of 16x (Benchmark Electronics: 21.4x, Plexus Corporation: 17.3x), justified by its average forward PE of 16.3x over the past 20 years.
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- Contribution from new products, particularly from the life sciences and industrial spaces.
- Dividend yield of 5.3%, one of the highest in the technology sector.