UOB Kay Hian 2015-08-06: Venture Corporation - 2Q15: Pick-up After A Slow Start. Maintain BUY.

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VENTURE CORPORATION LIMITED V03.SI

2Q15: Pick-up After A Slow Start 

• 2Q15 results were in line with expectations. 
• Revenue growth has accelerated but operating expenses and taxes have increased as well. 
• Venture’s strength lies in its diversified customer base and ability to produce a wide range of high-value and complex electronics products. 
• It is targeting to achieve mid to high single-digit growth in top- and bottom lines for 2015. 
• Maintain BUY. Target price: S$9.00. 

RESULTS 

• Venture reported net profit of S$36.1m in 2Q15, in line with our forecast of S$35.3m. 
• Acceleration in revenue growth. Revenue increased by 10% yoy (1Q15: 3% yoy) due to increased shipment to customers and appreciation of the US Dollar against the Singapore Dollar. The economic environment remains challenging. Venture was able to do well by securing more programmes from existing customers and winning new customers. 
• Revenue growth was broad-based with contributions from Computer Peripherals & Data Storage, Networking & Communications and Test & Measurement / Medical segments. 
• Overcoming drag from higher taxes. Gross margin was maintained at 21.2%. Wages increased by 4.9% yoy, benefitting from weakness in the ringgit. Other operating expenses increased 14.1% yoy due to higher manufacturing overheads, particularly from its Shanghai plant. The effective tax rate was higher at 14.6% (2Q14: 10%). Net profit grew 7.4% yoy despite the higher taxes. 

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. Venture benefits from the depreciation of the ringgit given that its facilities located in Johore and Penang accounted for 65% of its manufacturing capacity. 
• Less disruption from M&As. Recent M&As were less disruptive than in the past: 
  1. Avago had announced the acquisition of Emulex in February and Broadcom in May. Venture manufactures fibre optics transceivers for Avago and will benefit as Avago expands its product offerings and gains market share. 
  2. HP had announced its plan 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 and printing businesses will be named HP Inc. and will retain the current logo. 
  3. Another smaller US-based customer has also announced its 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 15%. 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 had secured a 5% stake in May 15. Nevertheless, the fragmented shareholding structure makes Venture a potential takeover target. 

EARNINGS REVISION/RISK 

• We have kept our earnings forecast unchanged. 

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 6.2%, one of the highest in the technology sector.

Jonathan Koh CFA | http://research.uobkayhian.com/ UOB Kay Hian 2015-08-06

BUY Maintain BUY 9.00 Same 9.00