Venture Corp - Count On Its Growth Momentum
- 1Q17 within expectations.
- Solid business execution.
- Reiterate BUY on higher FV.
Strong start to FY17
- Venture Corporation Ltd (VMS) recorded a strong start to FY17 as 1Q17 revenue jumped 33.7% YoY to S$843.1m on the back of new product and programme execution with several customers mainly in the Test & Measurement/Medical & Life Science/Others (TMO) as well as Retail Store Solutions & Industrial Products (RSS) segments.
- In-line with revenue growth, 1Q17 operating expenses rose 33.1% YoY to S$784.2m, attributable mainly to increase in changes in finished goods and work-in-progress, and raw materials used, as well as employee benefits expense. Consequently, 1Q17 profit before tax (PBT) jumped 41.3% YoY to S$60.0m.
- Despite a 72.7% increase in tax expense, PATMI surged 35.6% YoY to S$48.6m, and met our expectations as it formed 23.7% of our FY17 forecast. Note that the first quarter has historically always been the weakest period in any given year since FY13.
- VMS’ YoY improvement in PBT and net margins by 0.4ppt and 0.1ppt to 7.1% and 5.8%, respectively, was driven by management’s efforts to increase productivity and also through the pursuit of value creation for its customers. This strategy of value creation that has been in the works for the past few years is now bearing fruit and we expect it persist in the years to come.
Raised our FV to S$13.00 to reflect longerterm outlook
- Since the start of FY17, VMS’ share price has appreciated 23.5% to close at S$12.20 on 28 Apr.
- In order to appropriately factor in VMS’ longer-term growth outlook, we are switching our valuation methodology from P/E-based to DCF-based (risk free rate: 2.6%; WACC: 7.7%; terminal growth: 2%) over a five-year horizon.
- Keeping our FY17 and FY18 forecasts largely unchanged while introducing estimates from FY19 to FY21 into our valuation model, we derive a 12-month fair value estimate of S$13.00 (prev: S$11.00).
- Supported by a decent forward dividend yield of 4.5%, reiterate BUY on VMS, as we continue to like its strong balance sheet, stable cash flow, and steady earnings growth momentum.