Venture Corporation - DBS Research 2016-04-29: Strong growth despite currency headwinds

Venture Corporation - DBS Research 2016-04-29: Strong growth despite currency headwinds VENTURE CORPORATION LIMITED V03.SI 

Venture Corporation - Strong growth despite currency headwinds 

  • 1Q16 net profit of S$ 36m (+10% y-o-y) was at the upper end of our estimates while operating cash flow was significantly above our estimates.
  • Growth segments are much bigger (39% of total) than the declining segments (16% of total) now.
  • Rise in minimum wages and foreign worker levies in Malaysia is not a big concern, contrary to our previous view.
  • Maintain Buy with an unchanged TP of S$ 9.00 for potential returns of 13% including 6% yield.

Solid growth despite currency headwinds; solid cash generation. 

  • Revenue of S$ 630m (+4% y-o-y) was at the upper end of our estimate of S$34-36m, despite the appreciation of SGD against the USD in 1Q16. 
  • We estimate revenues to have grown by ~1.5% in constant currency terms. 
  • New product launches resulted in Test & Measurement/Medical & Life Science/others and Networking, Communications segments growing by 25% and 9% y-o-y respectively in 1Q16. This helped to offset declines in computer peripherals and data storage and printing and imaging segments. 
  • EBIT margins declined c. 10% on a q-o- q basis with the appreciation of MYR against SGD, driving staff costs higher. 
  • On another positive note, operating cash flow was much higher at S$95.6m due to a reduction in receivables and an increase in payables. This resulted in net cash increasing 23% y-o-y to S$402m, almost one-quarter of its market capitalization.

No material impact from hike in minimum wages and foreign worker levies in Malaysia. 

  • Minimum monthly wage in Malaysia will be raised from RM900 to RM1000 effective July 2016. 
  • Venture claims to pay most of its employees above these levels based on the performance. On top of this, as we understand, annual foreign worker levy will be raised from RM1250 to RM1850 from April 2016 onwards, implying 4-5% rise in the cost of hiring a foreign worker. 
  • Overall, we estimate staff costs in Malaysia to rise by 5-6% due to these measures. 
  • We estimate that over 60% of staff costs are incurred in Malaysia. 
  • Venture is confident of managing these changes with headcount optimization and innovation capability. 

Growth segments are much bigger than the declining segments now. 

  • Test & Measurement/Medical & Life Science/others segment grew 25% y-o-y while the revenue share from Computer Peripherals & Data Storage segment and Imaging & Printing segment dropped off 22%. This should benefit Venture as growth segments (39% of total revenue versus 32% in 1Q15) have become quite sizable compared to the declining segments (16% of total versus 21% in 1Q15).

Maintain Buy. 

  • Our target price of S$9.00 is based on a historical mean PE of 15x on FY16F earnings. 
  • The stock offers potential return of 7% in addition to a 6% dividend yield.

Sachin Mittal DBS Vickers | http://www.dbsvickers.com/ 2016-04-29
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 9.00 Same 9.00