Venture Corporation - UOB Kay Hian 2015-11-18: Key Takeaways From Non-Deal Roadshow

Venture Corporation - UOB Kay Hian 2015-11-18: Key Takeaways From Non-Deal Roadshow VENTURE CORPORATION LIMITED V03.SI 

Venture Corporation (VMS SP) - Key Takeaways From Non-Deal Roadshow 

  • Customers are turning more cautious due to uncertainties over the outlook for the global economy. 
  • Revenue is expected to be flat for 4Q15 and we anticipate mid-single digit revenue growth for 2016. 
  • Venture is positioned to weather the possible slowdown due to its well-diversified customer base and ability to create stickiness in customer relationships. 
  • Maintain BUY with target price at S$9.25. 




WHAT’S NEW 

  • We hosted Venture Corporation for a Non-Deal Roadshow on Wednesday 11 Nov 15, post announcement of their 3Q15 results. 

• Uncertainties from macro environment. 

  • Management sees uncertainties over the outlook for the global economy. The lead time for delivery of components has improved as demand has waned. The strength of the US dollar could also affect price competitiveness of its predominantly US-based customers. 
  • While Venture has a well-diversified customer base, it will not be spared should the broader economy weaken in 1H16. 

• Customers are cautious and revenue is anticipated to be flat for 4Q15. 

  • We also expect Venture to deliver mid-single digit revenue growth for 2016, compared with our previous expectations of high single-digit revenue growth. 

• A sustainable and defensive business model. 

  • Venture focuses on creating value for customers to sustain future growth. It forges close partnership with customers by supporting them during the front-end product development stage to reduce time-to-market. 
  • Its engineers also help customers miniaturise their products and lower production costs by reducing component count. 

• Existing customers provided bulk of growth. 

  • Excluding the impact from the appreciation of the US Dollar, underlying business volume would have grown about 7% yoy in 3Q15. Venture has gained market share by securing a larger allocation of production volume and winning more new programmes from existing customers. 
  • There were also contributions from new customers. About two-thirds of the increase in business volume came from existing customers and the remaining one-third from new customers. 

• Diversity is strength. 

  • Venture focuses on manufacturing complex high-value and high-mix electronic products. It is not a volume player. It is selective and focuses on businesses that are sustainable. Venture has a total of 192 customers. 
  • Its largest customer accounted for only 10-15% of revenue. Its top-10 customers accounted for 45- 50% of revenue. It aims to maintain net margin above a minimum of 5%. 

• Trending towards environment and energy conservation. 

  • There is greater awareness to protect the environment due to the ongoing haze and global warming. Demand is increasing for instruments that measure critical parameters for air and water, such as purity and chemical composition. 
  • Venture also manufactures apparatus that filters and cleans air and water. It produces power inverters for ABB and metering devices for Elster that reduce energy consumption. 

• Uplift from Life Sciences. 

  • Venture’s key Life Sciences customers include Agilent, Thermo Fisher and Illumina. Demand for genome sequencers is expected to increase due to Precision Medicine. Doctors are able to tailor the right medicine and therapies targeted at patients’ genetic make-up. Treatments would be more effective and side effects reduced through Precision Medicine. 
  • Venture’s knowledge on encryption is also brought to bear to provide secured transmission for highly confidential information on patients’ genome map. 


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. 
  • We expect Venture to maintain final dividend at 50 S cents/share for 2015. The stock provides lucrative dividend yield of 5.8%. 


EARNINGS REVISION/RISK 

  • We maintain our existing earnings forecast. 


VALUATION/RECOMMENDATION 

  • Maintain BUY. 
  • Our target price for Venture is S$9.25, based on 2015F PE of 15.8x (Benchmark Electronics: 12.9x, Plexus Corporation: 14.6x), justified by its average forward PE of 16.4x over the past 10 years. 


SHARE PRICE CATALYST 

  • Contribution from new products, particularly those from the Life Science space. 
  • Dividend yield of 5.8%, one of the highest in the technology sector.



Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-18
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 9.25 Same 9.25


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