DBS Vickers 2015-08-19: Venture Corp - Windfall From Strong US Dollar and Weak Ringgit.

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VENTURE CORPORATION LIMITED V03.SI

Windfall From Strong US Dollar and Weak Ringgit 

Consensus FY16F earnings have room to rise further. 

• Street forecasts are not fully factoring in the impact of a 15% decline in SGD/MYR exchange rate over the last one year. Almost 60% of staff costs are denominated in MYR for Venture. According to our sensitivity analysis, each 2% decline in MYR would have a 1.5% positive impact on Venture’s profits. 

Strong USD to benefit sales and earnings. 

• USD/SGD exchange rate has also appreciated 12% over the last one year. 100% of Venture’s sales are denominated in USD, about 50% of which go to US and rest 50% to EU and Asia. A strong USD can also dampen demand from EU and Asia. 
• Overall, we estimate that each 1% rise in USD would have a 1% positive impact on Venture’s profits. 

Our FY15F/16F earnings raised 4%/10% due to the above factors. 

• We have not factored in the impact of any additional business which Venture could secure arising from the lower cost of production out of Malaysia due to the weak Ringgit. In constant currency terms, we expect Venture to register 4-5% earnings growth in FY16F as some of the weaker segments such as PC, Printing and Imaging have already declined to just 20% of the group's revenue. The remaining 80% of the business is expected to see mid-single-digit growth in constant currency terms. 

Valuation: 

• Our target price of S$9.00 is based on a historical mean PE of 15x on average FY15F-16F earnings. The stock offers potential returns of 16% including a 6% yield and is a safe haven from declining Asian currencies. 

Key Risks to Our View: 

• A potentially weak USD or stronger MYR would be the key risk to our forecasts. A severe deterioration in US and Europe's economy could affect corporate spending, which will in turn adversely impact Venture's results.

CRITICAL DATA POINTS TO WATCH 

Earnings Drivers: 

Weak MYR to reduce costs and boost earnings. 

• MYR has depreciated 16% against the SGD over the last one year. Almost 60% of staff costs are incurred in Malaysia, 15% in China, 20% in Singapore and 5% in US. Staff costs came out ~S$247m in FY14 or 10.6% of group revenue. We expect 60% of this cost or S$148m to be impacted due to weak MYR. 
• Our in-house forecast for USD/MYR rate is 2.84 by 2Q16, which implies that MYR can continue to remain weak. According to our sensitivity analysis, each 2% decline in MYR would have a 1.5% positive impact on Venture. 

Strengthening USD to boost revenue and earnings. 

• 100% of Venture’s revenues are denominated in USD, about 50% of which go to US and the remaining 50% to EU and Asia. USD has appreciated 12% against SGD over the last one year, which should result in higher recognised revenues. In 2Q15, about 5% y-o-y sales growth was due to the stronger USD. A strong USD can also dampen demand from EU and Asia. Overall, we estimate that each 1% rise in USD would have a 1% positive impact on Venture’s profits. 
• Going forward, with indicated increases in US policy rates, the US dollar is expected to appreciate further compared to regional currencies. Our in-house forecast for USD/SGD rate is 1.45 by 2Q16, implying that USD can appreciate further from the current levels. 

Growth in Test, Medical and Life Science segment. 

• Increased focus on lower-cost technologies in healthcare is likely to boost the Test, Medical and Life Science segment. The higher growth has also resulted in the segment gaining a larger share of revenues (one-third now) while the revenue share from Computer Peripherals & Data Storage segment and Imaging & Printing segment has dropped off to just 20%. This should benefit overall growth at Venture. 

Higher tax burden. 

• Venture saw its effective tax rate increase due to expiration of certain tax exemptions over the past few years. As a result, the rate is expected to rise to about 14% from FY15F onwards versus sub-10% levels last year. 

Balance Sheet: 

Strong balance sheet position. 

• The company has maintained a net cash position, which should support the current dividend payout with a yield of c.6%. With no major capital projects in the near term, we expect the company to maintain its net cash position. 

Share Price Drivers: 

• Improved top-line growth and margin improvement support valuation. The strengthening of the USD is expected to improve top line as well as margins. 
• In addition, positive economic indications from Venture’s largest market, the US, is also helping the company's prospects. However, a stronger US dollar could dampen the demand from EU and Asia.

Sachin MITTAL | http://www.dbsvickers.com/ DBS Securities 2015-08-19

BUY UPGRADE HOLD 9.00 Up 8.40