Venture Corporation (VMS SP) - UOB Kay Hian 2017-05-02: 1Q17 Earnings Above Expectations, 2017 Shaping Up Nicely

Venture Corporation (VMS SP) - UOB Kay Hian 2017-05-02: 1Q17 Earnings Above Expectations; 2017 Shaping Up Nicely VENTURE CORPORATION LIMITED V03.SI

Venture Corporation (VMS SP) - 1Q17 Earnings Above Expectations; 2017 Shaping Up Nicely

  • Venture’s 1Q17 net profit was better than expectations. 
  • Revenue grew 34% yoy and pre-tax margin improved 0.4ppt yoy to 7.1%. Top-line mix tilted towards the higher margin test and measurement/medical segment. 
  • We remain bullish and raise FY17- 19 net profit forecasts by 10-13%. 
  • Maintain BUY with a higher PE-based target price of S$13.60 (previously S$12.40).



RESULTS


Continuing to outperform. 

  • Venture Corporation (Venture) reported 1Q17 net profit of S$48.6m (+35.6% yoy), which exceeded our and market expectations. 
  • 1Q17 net profit accounts for 23% of our full year estimate vs historical averages of 20-22%.

Test & measurement/medical the key driver, complemented by networking & communications. 

  • Group revenue growth exceeded expectations and was driven by the test and measurement/medical segment, which surged 78.7% yoy and 9.9% qoq. The group clearly benefitted from the favourable shift towards the high-margin test and measurement/medical segment, which accounted for 52% of group 1Q17 revenue (1Q16: 38.9%, 1Q15: 32.2%). 
  • Networking and communications revenue also delivered a solid growth of 22% yoy.

Stronger margins from improved product mix and amortisation. 

  • Pre-tax margin expanded 0.4ppt yoy to 7.1%, helped by several factors, including a shift in contributions towards higher-margin products as well as a sharp 38% yoy decline in amortization as the carrying value of an intangible asset for customer relationship was fully amortised in 2016.

Strong cash position despite higher working capital requirements. 

  • Venture’s 1Q17 net cash dipped slightly to S$400m (S$1.43/share) from S$407m as at 4Q16 (S$1.46/share). We understand the slight decline was due to higher working capital requirement to support revenue growth.


STOCK IMPACT


Focus on value creation paying off. 

  • The group’s analysis of every segment of the value chain and how to add value to customers has clearly paid off since 4Q16. 
  • Venture’s emphasis on generating value for customers and helping them achieve their business objectives, so as to reap rewards with more business and sustainable margins.

Collaborative partnerships the key. 

  • Venture’s collaboration and alliances with industry leaders is bearing fruit. 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 progressive shift towards test & measurement and medical/life science products, which are seeing wider and new applications in areas such as food safety, environmental analysis and medical diagnostics have been delivering positive impact on margins.

Upside to dividends. 

  • While there was no guidance on dividends during the analyst briefing, we see upside to 2017 DPS. 
  • Earnings growth continues to exceed expectations and we believe the group could easily raise DPS to S$0.55/share in 2017, still a conservative payout of 65% vs 76% in 2016 and 89% in 2015.


EARNINGS REVISION/RISK

  • We raise our net profit forecasts for 2017-19 by 10-13% on the sustainable improvement in net margins and higher revenue growth, particularly from the measurement/medical segment. Following our revision, we estimate 3-year net profit CAGR at 17%.


VALUATION/RECOMMENDATION

  • Maintain BUY. After our earnings revision, our target price is S$13.60 (previously S$12.40), based on 16x 2017F PE (Benchmark Electronics: 19.3x, Plexus Corporation: 15.4x), and in line with its average forward PE of 16.3x over the past 20 years. 
  • We think our target price is conservative as we have not built in the potential for valuation to expand as a result of management’s strong execution track record.


SHARE PRICE CATALYST

  • Further contribution from new products, particularly from the life sciences and industrial spaces as well as continued margin expansion.
  • Dividend yield of 4.5%, one of the highest in the technology sector.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-02
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 13.60 Up 12.400



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