Venture Corporation - UOB Kay Hian 2016-02-26: 4Q15 Steady Revenue, Curbed Expenses

Venture Corporation - UOB Kay Hian 2016-02-26: 4Q15: Steady Revenue, Curbed Expenses VENTURE CORPORATION LIMITED V03.SI 

Venture Corporation (VMS SP) 4Q15: Steady Revenue, Curbed Expenses 

  • Results were above expectations due to tightening of staff costs. 
  • Net margin expanded 0.6ppt yoy to 6.4% despite a higher effective tax rate of 15.6%. 
  • Venture will focus on product development in new domains, such as life science/medical, high-end instrumentation and 3D printing, to sustain future growth. 
  • Venture provides an attractive dividend yield of 6.2%. Maintain BUY. Target price: S$9.25. 


RESULTS 

  • Venture reported net profit of S$44.8m in 4Q15, ahead of our forecast of S$38.7m. 

 Steady performance despite macro headwinds. 

  • Revenue growth of 2.9% yoy in 4Q15 was aided by the 8% appreciation of the US$ against the S$. Revenue from networking & communications grew 16.3% yoy while test & measurement/medical’s expanded 10% yoy. 
  • Venture supported several customers in the launching of new products. It also secured four new customers in the retail store solutions & industrial space in 2015. 

 Net margin expanded. 

  • Gross margin was stable at 21.4%. Venture cut staff costs by 4.9% yoy and 5.7% qoq. Pre-tax margin expanded 1ppt to 7.6%. Net margin expanded 0.6ppt to 6.4% despite a higher effective tax rate of 15.6% (4Q14: 11.6%). 
  • Venture has restated its profit & loss statement for 4Q14 to include an impairment of S$63.8m for associate DMX (wrote off the entire investment). 
  • Venture recommended a final dividend of 50 cents/share. The proposed dividend will be paid on 18 May if approved during the AGM on 27 April. 


STOCK IMPACT 


 Focus on creating value for customers. 

  • Venture has executed well in engineering design and new product development, resulting in value creation for customers and gain in market share. 
  • It will continue to build distinctive differentiation by developing new strengths and capabilities to stay ahead of competition. It will continue to strengthen its core competencies to sustain future growth. 

 Slow start in 1H16, followed by a ramp-up in 2H16. 

  • Customers have toned down their forecasts due to the uncertain outlook and volatility in financial markets. Management expect a slow start in 1H16 before catching up in 2H16. 
  • Venture will focus on product development in new domains, such as life science/medical, high-end instrumentation and 3D printing. 

 Reposition technical and management talents. 

  • President Tan Kian Seng has been reassigned to be the advisor to the CEO for special projects. Management of operations at various manufacturing sites and business units is now handled by EVP for Technology Products & Solutions Lee Ghai Keen and EVP for Advanced Manufacturing & Design Solutions Dharma Nadarajah. 
  • Lee leads Venture’s group-wide R&D efforts and runs the Retail Store Solutions & Industrial Products unit and manufacturing sites in Singapore, Malaysia and China. Dharma runs Venture’s Electronics Manufacturing Services business covering product design and engineering, supply chain and supplier management, advanced manufacturing and test process development, product development and manufacturing and new product introduction. 

 Uncertainty over Malaysia’s policy on foreign workers. 

  • The Malaysian government will impose a levy of RM2,500 for foreign workers in the manufacturing, construction and services sector and a levy of RM1,500 for foreign workers in the plantation and agriculture sectors. The sudden hike caught many by surprise. The government took a step back to relook at the issue after vocal protests from the Federation of Malaysian Manufacturers (FMM) and the business community. 
  • The government also announced an agreement with Bangladesh’s government to allow 1.5m Bangladeshis to seek jobs in Malaysia. It subsequently froze the recruitment of foreign workers, which would provide time for the government to assess gaps in the labour force and review the levy system for foreign workers. 
  • The Malaysian government has made two about turns on policy for foreign workers within a short space of time. The FMM has urged the government to bring clarity to the issue of levy and recruitment of foreign workers so as not to damage confidence to invest in Malaysia. 


EARNINGS REVISION/RISK 

  • We tweak our net profit forecasts for 2016 and 2017 higher by 1% and 0.5% respectively due to improved cost efficiency, which is partially offset by a higher effective tax rate of 15.5% (previously 15%). 


VALUATION/RECOMMENDATION 

  • Maintain BUY. Our target price is S$9.25, based on 16x 2016F PE (Benchmark Electronics: 13.5x, Plexus Corporation: 14.7x), 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 and industrial space. 
  • Dividend yield of 6.2% is one of the highest in the technology sector. 



Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-26
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 9.25 Up 9.15


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