Venture Corporation - CIMB Research 2016-08-05: In line again

Venture Corporation - CIMB Research 2016-08-05: In line again VENTURE CORPORATION LIMITED V03.SI

Venture Corporation - In line again

  • 2Q16 results in line at 25% of our and consensus forecasts.
  • Test & Measurements/Others segment now accounts for 42% of sales (2Q15:33%, 1Q16:39%) as new products have been classified into this segment.
  • Working capital reduced to US$530m versus US$574m in 2Q15. Free cash flow of US$91m in 1H16 (US$48m in 1H15).
  • 2Q16 results aided by a 29% yoy decline in prototyping costs.
  • TP maintained at S$9.52, still based on 14x (6-year historical average) CY17F EPS.

We downgrade to Hold from Add.

  • Recovery continues Although 2Q16 revenue only rose 3.4% yoy, net profit grew by a stronger 20.3% yoy driven by engagement in higher value-added products with customers and a 29% yoy decline in prototyping costs. 
  • Operating EBIT excluding FX gains grew 13.4% in 2Q16, with profit margin at 6.7% versus 6.1% in 2Q15. 
  • Growth was driven by the Test & Measurement/Others segment which grew 27.3% yoy and contributed 42% to sales.

Strong balance sheet 

  • The balance sheet remains strong with net cash at US$211m in 2Q16 versus US$115m in 2Q15. This was notwithstanding Venture reducing its borrowings by US$31m from its debt position as at end-Dec 2015. 
  • During the quarter, Venture also paid out US$102m as dividends. Working capital position was similarly improved to US$530m at end-2Q16 versus US$574m in 2Q15.

Stronger 2H if historical trend repeats 

  • Going forward, Venture expects business sentiment to remain mixed across the group’s diverse customer-base. But the company believes that this customer diversity across niche and strategic technology domains and market verticals can indeed provide stability and resilience to its long-term overall performance. 
  • Barring unforeseen circumstances, the traditional pattern of a stronger second-half vis-à-vis the first-half should repeat.

Hold for dividend yield 

  • We maintain target price of S$9.52 but downgrade our call to Hold for Add previously.
  • Barring unforeseen circumstances, the historical trend of a stronger second-half should continue to hold. 
  • Base DPS of S$0.50 remains defensible given the company’s limited capex. 
  • Re-rating catalysts are better-than-expected margins due to engagement in higher value-added products with customers. Key risk continues to be order pull backs by customers.

William TNG CFA CIMB Research | 2016-08-05
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 9.520 Same 9.520