Venture - Maybank Kim Eng 2016-01-06: Net Beneficiary of USD Gains

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VENTURE CORPORATION LIMITED V03.SI 

Venture (VMS SP) - Net Beneficiary of USD Gains 

What if USD gains 10% plus four rate hikes? 

• We expect Venture to be a net beneficiary of a higher USD while there is zero impact from higher interest rates. 

Further USD gains would be net positive on paper 

• If USD gains 10% against SGD, we expect Venture to benefit on paper. As revenue is all in USD, it will be worth more in SGD. 
• Direct costs such as materials at 80% of its COGS are also in USD. 
• A 10% boost to its topline in FY16 should flow straight to its bottom line, all else being equal. 
• The net effects will depend on currency changes in the countries where it manufactures: Malaysia and China. 
• The impact should be minimal as local operating and factory costs are not large, at c.10% of COGS. 
• Inflation in rentals, salaries, utility charges and transport costs among its indirect costs would also reduce its gains. 

Though customer demand could be hit 

• However, customer demand may be dampened by further USD strength as Venture’s customers are overwhelmingly American. 
• A strong USD will affect their price competitiveness in the global marketplace and curtail consumption. 
• We cannot capture this in our forecasts. 

No impact from higher interest rates 

• We foresee little impact from interest-rate hikes, even if they come four in a row. 
• First, Venture has low debt and its SGD350-400m cash far outweighs short-term debt of SGD150-160m in 12-month bank borrowings. Interest income exceeds interest expense. 
• Second, all its cash is now kept in USD, given USD’s rising strength. 

Financial Metrics 

• Revenue growth has been picking up since 2013. Expect further momentum, especially with USD remaining strong against Asian currencies. 
• Pretax margins should continue to rise as Venture extends its value-adding partnerships with more OEM customers. 
• Balance sheet and cash flow have always been strong. With capex trending down from FY15 peak, there is potential to raise already-generous dividends.
• TP S$10.70. Maintain BUY.

Swing Factors 

Upside 

• Strength in US economy, especially in segments that Venture is exposed to. 
• Continued strength in USD due to Venture’s 100% revenue exposure to this currency. 
• Faster-than-expected growth in 3D printing, a promising segment that has lagged others such as Life Sciences. 

Downside 

• M&As among customers. Acquisitions of Venture’s customers by others could disrupt or discontinue orders. 
• USD strength may erode competitiveness of Venture’s customers in the global marketplace, lowering orders for Venture. 
• Increased customer demand for Venture to hold more inventory at major hubbing sites, which would tie down cash that could be used to pay more dividends.

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-01-06

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 10.70 Same 10.70