Venture Corporation - CIMB Research 2015-12-09: US recovery play

VENTURE CORPORATION LIMITED V03.SI

Venture Corporation - US recovery play

Tailwinds for Venture include recovering US economy, strong US$ and weak Asian currencies.
FY17 earnings will be boosted by the completion of a S$16.8m amortisation charge for the acquisition of GES 10 years back
TPP and new demand from non-traditional tech companies keen to leverage their customer base could present long-term opportunities.
Backed by strong FCF, base-case DPS of S$0.50 has been the established record.

Maintain Add. 5.9% dividend yields can limit any share price downside. TP S$10.11.

Venture’s earnings momentum was hurt by customer consolidation in recent years. Most of these have passed and ‘normalcy’ has returned. Further M&As of its customers in the US cannot be ruled out but Venture now has ample experience in dealing with such situations. The stronger US$, though a boon to Venture, does have a flip side as US exports become more expensive. Global economic conditions will affect Venture’s customers but the consensus view of a US recovery helps.

A blue ocean strategy places Venture in good stead to address new opportunities. The company is already engaged in life sciences products and 3D printing.
Non-traditional tech companies such as Alphabet and Amazon are also capitalising on their user base to push new devices. This could spell opportunities for Venture given its excellent track record in product design.

A feature of the TPP agreement requires members to join the WTO Information Technology Agreement (ITA), a key trade pact that eliminates tariffs on tech products.
The Semiconductor Industry Association estimates that the ITA could eliminate tariffs on roughly US$1tr worth of tech products.

Over the years, there has been a trend of customers asking their manufacturing partners/suppliers to hold more inventories or act as hubs on their behalf. This has led to longer cash cycle days at Venture.
Over FY05-09, the average inventory days were 66 versus 101 days over FY10-14. Rising working capital requirements is one impediment to a higher dividend payout for Venture.

We reiterate our Add call on Venture, with an unchanged target price that is based on 14x CY17 earnings.
The market views Venture as a proxy play for the recovering US economy and US$ strength. Its base-case DPS of S$0.50 (5.9% dividend yield) will support the share price as the company continues to grow in a sustainable manner.
A fragmented shareholding structure could tempt private equity funds more than industry peers that have no need for extra capacity.

William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2015-12-09

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 10.11 Same 10.11