Venture (VMS SP) - A solid consensus beat
Maintain BUY with 4.5% higher TP of SGD11.50
- Maintain BUY on Venture post-FY16 net profit that was 2% above our forecast and 5% above consensus.
- TP is lifted 4.5% to SGD11.50 following our estimate revisions and is based on 15x FY17 P/E, in line with a three-year PEG of 1x.
- 4Q16 capped a strong year, which saw results improve in businesses with high potential for value-creation.
- We raised FY17/18F earnings by 3.5-4% to account for the stronger run-rate in 4Q, which we expect to be sustainable given management’s expectations for capex to stay high in FY17. We see this as a leading indicator of management’s confidence in future growth.
4Q/FY16 above expectations
- 4Q core NP jumped 27% YoY in a very strong finish to the year, pushing the full-year core NP up 23% YoY to SGD180.5m, 2% above our forecast and 5% above consensus.
- The outperformance was mainly driven by Test & Measurement Medical & Life Sciences, where revenue rose 37% YoY to account for 43% of total revenue in FY16, up from 34% a year ago. It was as high as 47% in 4Q16.
- The higher margins of the segment also helped to improve the overall net margin to 6.3% in FY16, up 0.5ppt YoY.
Dividend hunger pangs
- The only slight disappointment was in dividends, as Venture maintained a full year DPS of 50 SGD cents vs our forecast of 55 cents.
- With rising profits, the payout ratio fell from c.90% of net profit in FY15 to just 76% in FY16. If the current earnings trajectory continues to be as strong as we project, payout will fall to 54% by FY19, assuming a DPS of 50 cents.
- We think it is a matter of time and we continue to push for a higher DPS of 55 cents for FY17. Nevertheless, yield is still decent at 4.8% even with a DPS of 50 cents.
- Elevated capex an advance indicator Management guided for FY17 capex to stay high at FY16’s SGD33m, of which
- 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.