Venture Corporation - UOB Kay Hian 2015-12-04: Overall More Positive Impact From M&As

Venture Corporation - UOB Kay Hian 2015-12-04: Overall More Positive Impact From M&As VENTURE CORPORATION LIMITED V03.SI 

Venture Corporation (VMS SP) - Overall More Positive Impact From M&As 

  • We review the potential impact from M&As involving Venture’s customers. 
  • Venture would be affected by Avago selling its “sub-system business and related assets” of its fibre optic products division to Foxconn Interconnect Technology and further restructuring at HP Inc. 
  • On the other hand, it could gain from Danaher’s acquisition of Pall and Honeywell’s acquisition of Elster. 
  • Maintain BUY. Target price at S$9.15. 


WHAT’S NEW 

  • We review the recent M&As involving Venture’s customers to ascertain whether they affect the outlook for Venture. 

• Avago takes strategic shift towards semiconductors. 

  • Avago has streamlined its businesses by selling “sub-system business and related assets” of its fibre optic products division to Hon Hai Precision’s subsidiary Foxconn Interconnect Technology (FIT). It has also sold licensed designs and technologies to FIT and will act as worldwide sales agent for the optical sub-systems product lines. More than 900 Avago employees, including engineers and marketing staff, will be transferred to FIT in Nov 15. 
  • Avago is re-positioning to be a leading supplier of semiconductors for a diverse range of communications applications. It announced the acquisition of Emulex (converged networking solutions for data centres) in Feb 15 and Broadcom (wireless and broadband communications) in May 15. Venture would be affected by Avago selling its optical subsystems business but could benefit from opportunities to supply to new businesses that Avago has recently acquired. Nevertheless, we are concerned that revenue contribution from its networking & communications segment would be affected in 2016. 

• Further restructuring likely for HP. 

  • Hewlett Packard (HP) has separated into two publicly listed companies with effect from Nov 15. The enterprise infrastructure, software and services businesses was spun off and renamed as Hewlett-Packard Enterprise. The legacy personal systems & printing businesses that remain were named HP Inc. 
  • Venture continues to be an EMS provider to HP Inc. 
  • Unfortunately, consumers are increasingly checking their emails and surfing the Internet using their smartphones and tablets, affecting demand for HP’s personal computers and printers. In the latest 4QFY15 results, earnings from the personal systems and printing segments were down 14% yoy. HP’s management guided EPS of 33-38 US cents, against consensus estimate of 42 US cents, for the current quarter ending Jan 16. 
  • HP’s management intends to take decisive action to protect its core businesses. This could entail further restructuring that could affect order flows to Venture for the production of commercial printers and mobile printers. 

• Opportunity to expand into filtration. 

  • US-based customer Danaher announced the acquisition of Pall, a manufacturer of air and water filters. The US$20b filtration market is expanding due to demand for advanced purification systems for biomedical companies, who use them to produce biologics and drugs made from living cells. The acquisition provides an opportunity for Venture to expand into the lucrative filtration market. 
  • Danaher plans 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). Venture is likely to remain as an EMS provider for both companies. 

• Honeywell could expand volume for Elster’s meters. 

  • Honeywell has acquired Venture’s customer Elster. Germany-based Elster has two core businesses: 
    1. thermal gas solutions (measures and regulates the flow of natural gas) for commercial, industrial and residential heating, and 
    2. gas, water and electricity meters, including smart meters, software and analytics solutions. 
  • It has a large installed base of more than 200m meters deployed over the past 10 years. 
  • Honeywell has previously acquired Venture’s customer Intermec. Production volume for Intermec has increased due to Honeywell’s extensive distribution network across the globe. We expect similar positive impact on production volume for Elster’s meters. However, Honeywell does impose more stringent requirements on pricing and payment terms. 


STOCK IMPACT 


• Assessing impact from M&As. 

  • Overall, we believe the recent M&As involving Venture’s customers are less disruptive, compared to past M&As. Nevertheless, management cautioned that production volume could get affected during the merger integration process, which usually last for about nine months. 
  • We expect Venture to maintain final dividend at 50 cents/share for 2015. The stock provides a lucrative dividend yield of 5.9%. 


EARNINGS REVISION/RISK 


• Tone down expectations for networking & communications and printing & imaging. 

  • We expect revenue from networking & communications to increase by a slower 2.7% in 2016 (previously 9%) and 6.7% in 2017 (previously 8.2%). We expect revenue from printing & imaging to decline 13.2% in 2016 (previously -5.4%) and 9.1% in 2017 (previously flat). 
  • We cut our net profit forecasts by 2.2% for 2016 and 3.2% for 2017. 


VALUATION/RECOMMENDATION 


Maintain BUY. 

  • Our target price is S$9.15, based on 16.0x 2015F PE (Benchmark Electronics: 13.6x, Plexus Corporation: 15.1x), justified by its average forward PE of 16.4x over the past 10 years. 


SHARE PRICE CATALYST 

  • Contribution from new products from the industrial and life science space. 
  • Dividend yield of 5.9% is one of the highest in the technology sector.


Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-12-04
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 9.15 Down 9.25


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