Venture Corporation (VMS SP) - UOB Kay Hian 2017-11-06: 3Q17 Results Above Expectations; Making The Old Economy New

Venture Corporation (VMS SP) - UOB Kay Hian 2017-11-06: 3Q17 Results Above Expectations; Making The Old Economy New VENTURE CORPORATION LIMITED V03.SI

Venture Corporation (VMS SP) - 3Q17 Results Above Expectations; Making The Old Economy New

  • Venture’s 3Q17 results were above our expectations with net profit a whopping 134.8% higher yoy. 
  • 2017 has been a breakthrough year for Venture, justifying its approach for careful selection of customers that are industry leaders in fast-growing technology domains. This approach creates interdependencies between Venture and its customers, resulting in far superior net margins. 
  • Maintain BUY with a higher target price of S$23.50.



RESULTS


3Q17 results above our expectations. 

  • Venture Corporation’s (Venture) 3Q17 net profit came in 134.8% higher yoy, driven by a 50.5% yoy increase in sales and substantially lower operating expenses. Most of the revenue improvements ytd were attributed to the group’s strong execution of customer programmes which has deepened collaborative partnerships with strategic customers. 
  • The group has ceased disclosing revenue by business segment.

Highest net margins vs peers. 

  • Due to Venture’s careful selection of industry-leading customers in fast-growing technology domains, the company was able to maintain extraordinary net margins (3Q17: 10.5%, 9M17: 7.9%) vs peers (trailing 12-mth: < 5%). 
  • Venture’s shift in product portfolio towards the high-growth Test & Measurement/Medical and Life Science sectors has paid dividends in higher margins due to the higher complexity of products which are of high-mix low-volume in nature. 
  • Venture has been able to penetrate key customer ecosystems to help them engineer, design, research and develop new products.


STOCK IMPACT


Sustainable long-term net margins and no capacity constraints. 

  • We expect Venture’s net margin to be sustainable going forward due to its success in a key customer’s new products and strong presence in customer design content programmes as Venture currently has about 65% of sales coming from products with design content. 

Illumina continues to see strong demand for its NovaSeq sequencing system. 

  • The newly launched NovaSeq S4 Flow Cell will likely help drive Illumina’s earnings in the next few quarters. Keysight Technologies, another key customer of Venture’s Test and Measurement segment, reported a 24% yoy increase in orders in 3Q17. 
  • Venture’s management targets net margins of 6-10% going forward. Currently, it is not facing any capacity constraints. 

Fisher Tech proceeds. 

  • With the privatisation of Fisher Tech, Venture will receive S$31.6m in proceeds from its disposal of its 18.77% stake in Fisher Tech. The proceeds are likely to come in in 4Q17. 


EARNINGS REVISION/RISK

  • We raise our net profit estimates for 2017-19 by 22.4-41.5% as we have grossly underestimated Venture’s growth prospects and revenue momentum. 
  • Furthermore, Venture’s ability to control cost and strong customer profile put it in a strong position to capitalise on new opportunities from high-growth key customers. 


VALUATION/RECOMMENDATION

  • Maintain BUY with a new target price of S$23.50 (previously S$15.15), based on 18x 2018F PE (Benchmark Electronics: 18.3x, Plexus Corporation: 17.7x). 
  • We keep our dividend forecast unchanged at S$0.55/share for 2017, which represents a decent yield of 2.8%. 


SHARE PRICE CATALYST

  • Higher-than-expected growth from key customers in the medical devices, life sciences and industrial space. 
  • Higher-than-expected dividend payout. 




Jonathan Koh CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-06
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 23.50 Up 15.150



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