Venture Corporation - UOB Kay Hian 2016-07-15: No Bricks From Brexit

Venture Corporation - UOB Kay Hian 2016-07-15: No Bricks From Brexit VENTURE CORPORATION LIMITED V03.SI 

Venture Corporation (VMS SP) - No Bricks From Brexit

  • Venture did not experience any pullback in customer orders post-Brexit. Customers are cautious but have largely kept to their production forecasts. 
  • Management has maintained guidance of a gradual pick-up and positive sequential revenue growth in subsequent quarters. 
  • We expect growth to be driven by expanding scope of engagement with Keysight, Illumina, Waters and ABB and contributions from six new customers secured in 2015. 
  • Maintain BUY with higher target price of S$9.82.



WHAT’S NEW


Business as usual despite Brexit. 

  • Venture’s customers are cautious and restrained, but order flows are steady and customers' forecasts are largely unchanged. They have already toned down their expectations during the market turmoil during January and February and were well aware of potential repercussions from Brexit.
  • Management has not seen any pullback in orders linked to Brexit, and are thus maintaining guidance of gradual pick-up and positive sequential revenue growth in subsequent quarters.
  • More than 80% of Venture’s customers are US-based technology and industrial companies, particularly those headquartered around Silicon Valley. 50% of its products are shipped to the US, 40-45% to Asia Pacific and only 5-10% to Europe.

Future expansion centred at Penang. 

  • Venture has completed the acquisition of a huge 30.6-acre plot of land at Batu Kawan Industrial Park (Butterworth) for RM33.3m. The property has leasehold interest of 60 years. Batu Kawan is strategically located as it is linked to Penang Island by the Penang Second Bridge.
  • Management has decided to continue expanding within Malaysia due to the well- established eco-system for manufacturing of high-end electronic products. The depreciation of the Malaysian ringgit also provided further impetus. Malaysia is ranked 18th out of 189 economies for ease of doing business by World Bank. Cushman & Wakefield also ranked Malaysia 1st for cost competitiveness in highly automated manufacturing.
  • Venture has already paid downpayment of RM20m for the land in 2015. The balance of RM13m was paid in 2Q16. Venture has sufficient production capacity at its existing production facilities. The huge plot of land would be developed in stages starting 2017.

Potential positive impact from M&As. 

  • Cavium has entered into an agreement to acquire Venture’s key customer QLogic for US$1.36b or US$15.50/share to be paid by US$11.00 in cash and 0.098 Cavium shares. The acquisition allows Cavium to expand scale in data centre and storage markets, enabling the combined company to provide a diverse range of components for equipment used in data centres. The transaction is expected to complete in 3Q16.
  • Cavium is a fabless semiconductor company offering processor and board level products targeting routers, switches, appliances, storage and servers. Venture is a longstanding supplier to QLogic. There could be new opportunities for Venture as the combined company expands into data centre and storage space.

Minimal impact from hike in levy for foreign workers. 

  • Malaysia has imposed a levy of RM1,850 for each foreign worker hired for the manufacturing sector since Mar 16. The new levy, which is higher by RM600, only applies to new hires and existing staff is not affected. The impact is small as Venture has kept its head count relatively unchanged at about 12,000. Management does not foresee any escalation for staff costs.


STOCK IMPACT


Growing by creating value for customers. 

  • Venture has expanded engagement and has rolled out new programmes for existing customers Keysight (test & measurement), Illumina (genome sequencer), Waters (liquid chromatography) and ABB (power electronics and industrial automation). It will focus on product development in high-end instrumentation and life science/medical.
  • Venture has secured one new customer for Networking & Communications, three new customers for Retail Store Solutions/Industrial and two new customers for test & measurement/life science in 2015.

Hunting for yield post-Brexit. 

  • Venture provides attractive dividend yield of 5.7%. It has a solid track record of paying 50 S cents/share or more for the past 12 years. Venture is a laggard yield play that has just started to re-rate.
  • The stock is backed by net cash/share of S$1.45 as of Mar 16. 


EARNINGS REVISION/RISK

  • We maintain our existing earnings forecast for Venture. 


VALUATION/RECOMMENDATION

  • Maintain BUY. 
  • We have rolled forward our valuation to 2017. We have raised our target price for Venture from S$9.25 to S$9.82, based on 2017F PE of 16x (Benchmark Electronics: 16.6x, Plexus Corporation: 17.6x), justified by its average forward PE of 16.3x over the past 20 years.


SHARE PRICE CATALYST

  • Contribution from new products from Test & Measurement, Life Science and Industrial space.
  • Dividend yield of 5.7%, one of the highest in the technology sector.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-15
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 9.82 Up 9.25


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