UOB Kay Hian Research 2015-07-10: Venture - Gradual Sequential Improvement. Maintain BUY.

Gradual Sequential Improvement 

  • Management expects a gradual sequential pick-up in quarterly revenue after a lacklustre 1Q15. 
  • Fortunately, customers are sticking to their forecasts despite heightened uncertainties. 
  • Venture should be able to achieve mid- to high-single-digit growth for 2015 assuming Grexit does not cause a broader contagion to other European countries. 
  • Maintain BUY with target price at S$9.00. 


WHAT’S NEW 


 Anticipate gradual recovery. 

  • Management expects a gradual sequential pick-up in quarterly revenue after a lacklustre 1Q15. Customers have not made significant changes to their forecasts despite heightened uncertainties. 
  • We expect revenue to increase 4.5% qoq in 2Q15 and have modelled an 8.6% hoh increase in revenue in 2H15. 
  • Venture has built a diversified customer base, which continues to provide the company resilience and stability. 
  • Management is concerned about uncertainties in the macro environment, such as the potential spill-over impact from Grexit to the broader global economy. 
  • Fortunately, shipments to Europe account for only 10-15% of Venture’s total production. 
  • Management is also concerned about the social instability in Malaysia although its operations located at Johor and Penang are unlikely to be affected by the unrest. 
  • Venture benefits from the depreciation of the Malaysian ringgit as Malaysia accounts for 65-68% of Venture’s production capacity. 

 Growth from life sciences and industrial segments. 

  • Management is optimistic of growth from the Life Sciences segment where there is strong demand for new products, such as genome sequencers for customer Illumina. 
  • Management will consider disclosing revenue from Life Sciences as the segment has grown into a sizeable business. 
  • The Industrial segment is also doing well, especially for Waters’ liquid chromatographers. 
  • Networking & Communications segment benefits as optical fibre networks and data centres upgrade to 100Gbps Ethernet. 
  • For the Test & Measurement segment, orders for semiconductor testers are stable. 
  • Areas of weakness are legacy businesses in Printing & Imaging, Retail Store Solutions and Computer Peripherals & Data Storage. 

 Less disruption from M&As. 

  • Recent M&As were less disruptive compared to the past: 
    1. Avago has announced the acquisition of Emulex in February and Broadcom in May. Venture manufactures fibre optics transceivers for Avago and will benefit as Avago expand its product offerings and gain market share. 
    2. HP has announced plans to separate into two publicly listed companies. The enterprise infrastructure, software and services businesses will be spun off and renamed Hewlett-Packard Enterprise. The legacy personal systems & printing businesses will be named HP Inc. and will retain the current logo. 
    3. Another smaller US-based customer has also announced plan to separate into two publicly listed companies - a science & technology company (life sciences & diagnostics and dental, water quality and product Identification) and a diversified industrial company (test & measurement, retail fuelling, telematics and automation). 
  • Aberdeen has trimmed its stake in Venture from 20% in Mar 15 to the current 17%. 
  • Aberdeen is Venture’s largest shareholder and previously held a 25% stake in the company. Other institutional shareholders have bought more shares. 
  • Bank of Montreal has garnered a 5% stake in May 15. 

STOCK IMPACT 


 Cautiously optimistic. 

  • Venture is aiming for mid- to high-single-digit growth in top- and bottom lines for 2015. 
  • Disruptions from M&As involving its customers have abated. 
  • The depreciation of the Malaysian ringgit and the Singapore dollar will help Venture maintain net margin within the target 6-8% band. 
  • We expect Venture to maintain a final dividend at 50 cents/share for 2015. 
  • The stock provides a lucrative dividend yield of 6.5%. 


EARNINGS REVISION/RISK 

  • We maintain our existing earnings forecasts. 


VALUATION/RECOMMENDATION 

  • Maintain BUY. Our target price is S$9.00, based on 16.5x 2015F PE (Benchmark Electronics: 12.8x, Plexus Corporation: 14.2x), justified by its average forward PE of 16.4x over the past 10 years. 


SHARE PRICE CATALYST 

  • Contribution from new products, particularly from the Life Sciences space. 
  • Dividend yield of 6.5%, one of the highest in the technology sector. 


(Jonathan Koh, CFA)

Source: http://research.uobkayhian.com/




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