Venture Corporation - UOB Kay Hian 2015-11-09: 3Q15 ~ Broad-based Growth In Tough Market Conditions

Venture Corporation - UOB Kay Hian 2015-11-09: 3Q15 ~ Broad-based Growth In Tough Market Conditions VENTURE CORPORATION LIMITED V03.SI 

Venture Corporation (VMS SP) 3Q15: Broad-based Growth In Tough Market Conditions 

  • Venture reported good results with net profit increasing 12.2% yoy despite a drag from a higher effective tax rate. 
  • All business segments registered growth on a yoy basis with the exception of legacy Printing & Imaging. 
  • Venture’s competitive position is enhanced by the weakening of the ringgit as its production facilities located at Johor and Penang, 
  • Malaysia accounted for about 65% of overall manufacturing capacity. 
  • Maintain BUY. Target price: S$9.25. 


RESULTS 

  • Venture reported net profit of S$40.5m in 3Q15, slightly ahead of our forecast of S$39.1m. 

 Robust top-line expansion. 

  • Revenue grew a robust 15.7% yoy aided by appreciation of the US dollar against the Singapore dollar by 8% yoy. Excluding the currency effect, underlying business volume would have grown about 7% yoy. Venture has expanded engagement with customers and has rolled out new programmes across various industry sectors. 

 Better margins from improved product mix. 

  • Gross margin expanded by 0.3ppt qoq to 21.5% due to an improved product mix. Venture kept tight control over expenses, which increased by 8.9% yoy, slower than its robust revenue growth. Thus, PBT increased by a stronger 17.4% yoy. Effective tax rate has further increased to 15.6% compared with 14.6% in 2Q15. 

 Cash conversion cycle improved. 

  • Venture has implemented Vendor Managed Inventory (VMI), which reduces the holding of raw materials and stretches out payables. It has also improved collection of receivables. Free cash flow has improved from S$28m in 2Q15 to S$68.4m in 3Q15. 


STOCK IMPACT 


 Cautiously optimistic. 

  • The operating environment is challenging. Venture will pursue operational excellence, drive impactful innovation and develop new engineering competencies. It is able to support existing and new customers through its differentiated strengths and capabilities. 

 More competitive with a weaker ringgit. 

  • Venture sees its role in supporting customers’ aspirations to dominate and gain market share in their respective fields. It does not take advantage of customers when exchange rates work in its favour. Conversely, customers would not be penalised when exchange rates work against Venture. 
  • Nevertheless, the weakness for Ringgit does improve Venture’s competitiveness in attracting more business. Production facilities are located at Johore and Penang, Malaysia accounted for about 65% of Venture’s manufacturing capacity. 


EARNINGS REVISION/RISK 

  • We have trimmed our net profit forecast for 2016 by 1.8% due to a higher effective tax rate of 15%. 


VALUATION/RECOMMENDATION 

  • Maintain BUY. 
  • Our target price is S$9.25, based on 15.8x 2016F PE (Benchmark Electronics: 13.3x, Plexus Corporation: 15.0x), 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%, one of the highest in the technology sector.



Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-09
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 9.25 Up 9.00


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