CIMB Securities 2015-08-06: Venture Corp - 2Q15 Results. Higher tax rate ahead. Maintain ADD.

VENTURE CORPORATION LIMITED V03.SI

Higher tax rate ahead

Venture’s 1HFY15 earnings formed 41% of our and 43% of consensus full-year forecasts, below the historical average of 45%.
This was largely due to a higher effective tax rate in 2Q15.
The downside earnings risk from a higher tax rate, which we highlighted in our 1Q15 results note, has come home to roost.
We raise our tax rate assumption to 14% vs. 10% previously, leading to a 4.4% cut in our core EPS forecasts for FY15-17.
Target price is sliced by 4.5% to S$8.56 (still based on the 6-year historical average P/E of 14x on our CY16 forecast).
Potential catalysts include stronger-than-expected orders from customers while a 6.2% dividend yield continues to support the share price.
It remains confident of capturing more market share from existing customers.

Venture’s 2Q15 revenue rose 10% yoy, and we estimate that half of the growth was due to the stronger US$.
Although volume shipments grew yoy, Venture was not able to retain all the exchange gain benefits as customers requested for a price reduction.
However, pre-tax margins continue to benefit from Venture’s well-established cost reduction and productivity improvement culture.
Our key worry of higher taxes was realised in the second quarter results.
Effective tax rate in 2Q15 was 14.6% (1Q15:14.9%; 2Q14:10%).

Although the global economic landscape remains challenging, Venture is confident that it will be able to garner higher market share from existing customers as well as win new programmes and new orders.
Although the stronger US$ and weaker ringgit should provide tailwinds for Venture, the company’s wide mix of customers and long-term relationships with these customers seem to have whittled down exchange rate benefits.

We maintain our Add rating but cut our target price to S$8.56 as we factor in the new higher tax rate regime.
If the company is able to significantly increase revenue contribution from new tax favoured products, there is room for the tax rate to trend lower still, in our view.
We believe its base DPS of S$0.50 remains defensible given the company’s limited capex.

William TNG CFA | http://research.itradecimb.com/ CIMB Securities 2015-08-07

ADD Maintain ADD 8.56 Down 8.96