Venture Corporation - UOB Kay Hian 2016-04-29: 1Q16 Achieving Positive Alpha

Venture Corporation - UOB Kay Hian 2016-04-29: 1Q16 Achieving Positive Alpha VENTURE CORPORATION LIMITED V03.SI 

Venture Corporation (VMS SP) 1Q16: Achieving Positive Alpha 

  • Venture posted a good set of results despite turbulence in the macro environment in 1Q16. 
  • Growth was driven by orders from new customers in the test & measurement/medical/others segment. 
  • Venture has a resilient business model due to its diversified customer base and focus on complex high-value products. 
  • Dividend yield is attractive at 6% and the stock is backed by net cash/share of S$1.45. 
  • Maintain BUY. Target price: S$9.25. 


RESULTS 

  • Venture reported net profit of S$35.8m in 1Q16, in line with our forecast of S$35.9m. 

 Steady growth maintained. 

  • Management indicated that underlying business volume has grown by 1-2% yoy. Venture also benefitted from moderate strength of the US$ against the S$. Business sentiment was fragile in January and February but production managed to catch up in March. 
  • Revenue from Test & Measurement/Medical/Others grew a strong 25.4% yoy due to contributions from new customers in Life Science and “Others” category (some new customers span across multiple industry sectors). 

 Coping with higher taxes. 

  • Income tax expense increased 15.6% yoy. Effective tax rate widened by 0.7ppt yoy to 15.6% but has stabilised at 15-16% for the past three quarters. 
  • Results would have been even better if we exclude: 
    1. foreign exchange loss of S$1.7m due to holding of US$-denominated monetary assets, and 
    2. provision for doubtful debt of S$1.7m. 

 Efficiency in working capital management. 

  • Management has improved the collection of receivables, especially from tier-1 customers. It continues to work with suppliers to stretch out payables. It uses planning tools to optimise holding of inventories while ensuring quick turnaround and prompt delivery for customers’ orders. 
  • Venture invested S$7.2m in capex (1Q15: S$2.8m) to improve capabilities at existing production facilities for higher precision and throughput. It also acquired specialised equipment for production of new products. 


STOCK IMPACT 


 Focus on creating value for customers. 

  • Venture has gained market share and improved its profitability by leveraging on strong R&D initiatives, innovative product development and sustained operational excellence. 
  • It will continue to build distinctive differentiation by developing new strengths and capabilities to stay ahead of competition. 

 Venture is unaffected by the slowdown in industrial production and non-oil domestic exports in Singapore. 

  • Many companies are too inward looking. On the contrary, Venture scours overseas markets in the US and European for new customers and new opportunities, which enables Venture to outperform the Electronic Manufacturing Service (EMS) industry. These efforts to build a diversified customer base also provides resiliency. 

 Gradual pick-up and ramp-up in 2H16. 

  • We expect business volume to gradually increase in subsequent quarters. 
  • Venture will focus on product development in new domains, such as life science/medical and high-end instrumentation. New products include sample preparation and liquid chromatography. 


EARNINGS REVISION/RISK 

  • We maintain our existing earnings forecast. 


VALUATION/RECOMMENDATION 

  • Maintain BUY. Our target price is S$9.25, based on 16x 2016F PE (Benchmark Electronics: 13.5x, Plexus Corporation: 16x), justified by its average forward PE of 16.4x over the past 10 years. 
  • The stock is backed by net cash/share of S$1.45. 

SHARE PRICE CATALYST 

  • Contribution from new products, particularly from the Life Sciences and Industrial space. 
  • Dividend yield of 6%, one of the highest in the technology sector.



Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-04-29
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 9.25 Same 9.25


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