Venture Corporation - CIMB Research 2015-11-07: S$16.8m ‘bonus’ profit awaits in FY17

Venture Corporation - CIMB Research 2015-11-07: S$16.8m ‘bonus’ profit awaits in FY17 VENTURE CORPORATION LIMITED V03.SI 

Venture Corporation - S$16.8m ‘bonus’ profit awaits in FY17 

  • 3Q15 in line. Revenue growth aided by exchange rate and gains in market share with customers. 
  • Tax rate continues to climb due to higher non-tax exempt business contribution. 
  • Working capital lengthened on need to hold inventory on customers’ behalf. 
  • End of S$16.8m amortisation of intangible asset from GES acquisition (in Nov 2006) to boost FY17 earnings. 
  • Target price raised by 8% to S$10.11 as we remove GES amortisation. Still valuing Venture on 14x CY17 EPS. 

FX effect finally coming through 

  • FX impact was finally seen in 3Q15 results. Of the 16% yoy sales growth in 3Q15, ~55% was due to the stronger US$ versus S$ and 45% was due to higher volume shipments to customers. An exchange gain of S$3.0m was also reported. 
  • Venture also reported market share gains among existing customers and contributions from new customers. 

Core operations in good shape 

  • Test & Measurement/Medical/Others (36% of 3Q15 revenue) remained the key growth drivers with 29.1% yoy growth. 
  • The Printing & Imaging segment experienced its 3rd consecutive quarter of yoy revenue decline, falling 11% yoy in the third quarter. 
  • Pre-tax margins hit 6.9% in 3Q15, higher than 3Q14 (6.84%) and a continued improvement from 1Q15 (6.3%) and 2Q15 (6.4%). 

More work needed on working capital 

  • Working capital hit S$814.5m in 3Q15, driven by a sequential increase in inventories since 4Q14. The primary reason for the higher inventories is due to customers’ requests for hubbing support and to support customers’ programmes. We understand that a large part of the inventories relate to hubbing for customers. 

End of GES amortisation to boost profits from FY17 

  • On Venture’s 3Q15 balance sheet sits S$26.5m worth of intangible assets. A large part of these intangible assets relates to the fair value of customer relationships arising from Venture’s acquisition of GES on 29 Nov 2006. 
  • The yearly amortisation amounts to S$16.8m and will end by FY16, freeing the P&L statement from this charge against earnings from FY17. 

Raise target price by 8% 

  • We have made several changes to our forecasts: 
    1.  incorporating higher revenue growth due to the FX effect; 
    2.  higher R&D expenses; 
    3.  completion of GES amortisation; and 
    4.  a higher 15% tax rate to be prudent (3Q15 tax rate: 15.6%, 9M15:15.1%). 
  • At our unchanged 14x P/E multiple (6-year average), our target price is lifted to S$10.11. 
  • Maintain Add. 
  • Dividend expectation remains at S$0.50 per share (6.1% yield).

William TNG CFA CIMB Securities | 2015-11-07
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 10.11 Up 9.37