Venture Corporation - DBS Research 2017-11-06: Setting A Scorching Pace

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VENTURE CORPORATION LIMITED V03.SI

Venture Corporation - Setting A Scorching Pace

• 3Q17 surpasses expectations with profit surging to a record S$111.4m (+135% y-o-y, +60% q-o-q).
• Margin guidance is at a higher range.
• Potential for higher dividends in FY17F underpinned by record earnings and imminent disposal gains.
• Raise our earnings estimates; Maintain BUY with TP lifted to S$26.00.

Scaling new heights with unique positioning at the forefront of innovation. 

• Venture’s earnings surpassed expectations in 3Q17 with net profit surging 135% y-o-y and c.60% q-o-q to hit an all-time high of S$111.4m, and is set for a record FY17F. 
• Fuelled by positive industry backdrop and excellent execution, Venture’s share price has gained over 95% YTD in 2017, but we believe there is still room to run as it continues to deliver superior earnings performance. 
• Margin improvement was the key story in 3Q17 and demonstrates the group’s continued success in value-creation through increased design content and uniqueness in the broader Electronic Manufacturing Services (EMS) space, with exposure to attractive end-markets such as genome sequencing and networking and communications.
• Expectations of double-digit growth at key industry clusters provides strong visibility for Venture’s revenue growth prospects. Management guidance of a higher net margin range also raises our confidence in Venture’s ability to sustain margins at a historical high level.

Where we differ: We currently have the highest TP on the street. 

• We remain positive on Venture’s growth trajectory and believe the market has yet to fully price in the group's unique offerings, know-how and hard-to-replicate ecosystems.

Potential catalysts: 

• New products and continued expansion into non-traditional markets with higher margins, and new customer acquisitions are potential near term catalysts. 
• In the medium to long term, acquisition of companies along the manufacturing value chain could increase Venture’s capabilities.

Valuation

Maintain BUY with a revised TP of S$26.00. 

• We raise our TP to S$26.00, on the back of higher earnings estimates driven by better sales and margin expectations, still pegged to a PE multiple of 19.5x on blended FY18/19F earnings, which implies around 10% premium to peer average of 17.5x forward PE.

Key Risks to Our View

• Weakening global growth prospects. A broad global slowdown is likely to impact Venture due to its vulnerability to business cycles. 
• Potential weakening of the USD could also dampen revenue growth.

WHAT’S NEW

Venture continues to wow in 3Q17; profits rise solidly to a record S$111.4m 

• Venture’s earnings surpassed expectations in 3Q17 with net profit surging 130% y-o-y and 59.5% q-o-q to a record S$111.4m on the back of quarterly revenue of S$1,061.9m (+50% y-o-y, 4.8% q-o-q). 
• Top-line growth was supported by broad-based growth across all segments, with revenue increases across c.60 customers.
• Meanwhile, the higher-than-expected earnings beat was driven by a combination of
  1. sustained strong sales momentum, and
  2. margin improvements. 
• While sales growth momentum was similar in 2Q and 3Q17 – both growing substantially by c.50% y-o-y – EBITDA margin and net margin improved significantly on a sequential basis from 8.8% and 6.9% in 2Q17 to 12.2% and 10.5% in 3Q17, respectively.

Margin story is the key takeaway this quarter. 

• Apart from efficiency gains and an improved sales mix featuring higher design content compared to the previous quarter, the margin boost is also likely to have been supported by a higher proportion of R&D recoveries recognised during the quarter.
• While this quarterly net margin of 10.5% may not be repeated, we expect net margins to sustain at previously historical high levels of 8.4-8.5% in FY17/18/19 owing to higher proportion of high value-add design contracts and benefits of operating leverage as sales continue to grow.

Guidance for higher margins gives us comfort. 

• Management guided for higher net margins of 6-10% (vs 6-8% historically), which suggests increasing confidence in delivering sustainably higher margins ahead through greater value-add and design content.

Working capital management improves further. 

• Venture’s focus on lean and efficient work processes continued to bear fruit as its cash conversion cycle further improved to 75 days in 3Q17, compared to 80 and 93 days in 2Q17 and 1Q17, respectively. 
• Going forward, room for further optimisation remains. Separately, we also note that Venture’s net cash position has strengthened significantly over the quarter, +46% to S$535m (or S$1.88 per share) as at end-3Q17.

Further support for expectations of a higher dividend of 55 Scts vs 50 Scts historically. 

• With Venture set for a record FY17F, and further gains of S$12.7m (or c. 5 Scts per share) to be recognised in the upcoming quarter following the recent conclusion of the disposal of its stake in Fischer Tech, we see potential for a higher dividend payout for FY17F.
• Venture typically pays a fixed 50 Sct dividend p.a. but history shows that it did reward shareholders with a higher dividend of 58 Scts back in FY07 when earnings performance had peaked. We believe that Venture could take a similar approach to distributions in FY17F and are optimistic of a higher payout of c.55 Scts (or more) – as highlighted in an earlier report. At current price, this represents a prospective 2.8% yield.

Maintain BUY with higher TP of S$26.00 after raising earnings projections for FY17F-19F. 

• We continue to like Venture, which stands out for its unique positioning at the forefront of innovation and has a proven track record.
• Supported by still-positive industry backdrop, expectations of broad-based growth across its diversified client pool and imputing benefits of resultant operating leverage, we raise our earnings projections for FY17F/18F/19F by 30%/24%/23%.
• Pegging to a PE multiple of 19.5x on FY18/19F earnings, we arrive at a revised TP of S$26.00 for Venture. This implies around 10% premium to the average forward PE for high-mix low-volume EMS peers of 17.5x. 
• While Venture’s share price has re-rated significantly this year, gaining over 95% YTD, we believe continued superior earnings performance going forward will give the stock more legs to run.

Carmen TAY DBS Vickers | Suvro SARKAR DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-11-06

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 26.00 Up 21.000