Venture Corporation - UOB Kay Hian 2016-08-08: 2Q16 Steady When Others Fumble

Venture Corporation (VMS SP) - UOB Kay Hian 2016-08-08: 2Q16: Steady When Others Fumble VENTURE CORPORATION LIMITED V03.SI

Venture Corporation (VMS SP) - 2Q16: Steady When Others Fumble

  • Despite an adversarial operating environment, Venture generates growth by creating value for customers, winning more orders and expanding the scope of services with Keysight, Illumina, Waters and ABB. 
  • Venture possesses defensive strength through a diversified customer base and provides an attractive dividend yield of 5.6%. 
  • Maintain BUY. Target price: S$9.82.



RESULTS

  • Venture reported a net profit of S$43.4m in 2Q16 (+20.3% yoy), ahead of our forecast of S$37.8m.
  • The results included foreign exchange gains of S$3.2m, of which S$2.1m arose from a reclassification due to the loss of significant influence on an associate.

Expansion in high-value products. 

  • Growth was driven by a 31.6% yoy revenue expansion in test & measurement and medical/life science space. Venture has expanded engagement and rolled out new programmes for existing customers Keysight (semiconductor test equipment), Illumina (genome sequencer) and Waters (liquid chromatography). It also expanded the scope of services with industrial powerhouse ABB (power electronics and industrial automation). Networking & communications revenue also grew 4.8% yoy.
  • Revenue from legacy computer peripherals & data storage and printing & imaging segments declined 33.1 yoy and 28.6% yoy respectively. Net margin back to within 6-8%. We observe a favourable shift towards the high-margin test & measurement/medical segment, which accounted for 42.1% of total revenue (2Q16: 33.1%). 
  • Venture creates value for its customers through deep engagement in design and product development, allowing Venture to enhance its pricing. Venture also works on lean manufacturing and automation to improve its cost efficiency. Gross margin expanded 0.8ppt yoy to 22%.

Cash-rich. 

  • Venture had net cash/share at S$0.56 as of Jun 16 despite paying out a final dividend of S$0.50/share, or S$138.4m, for 2015.
  • Venture completed the acquisition of land at Batu Kawan Industrial Park, and S$5.7m of the total consideration of S$13m was paid in 2Q16.


STOCK IMPACT


Defensive strength on a diversified customer base. 

  • Management described the operating environment as “low tide”. Business sentiment remains mixed across Venture’s diversified customer base. However, this diversity across various niche technological domains provides stability and resiliency over the longer term. Venture has 198 customers and the top 10 customers accounted for 45-50% of revenue.
  • We expect a gradual pick-up and positive sequential revenue growth in 2H16.

Focus on creating value for customers. 

  • Venture generates growth despite the adversarial operating environment by creating value to win more orders from customers. It will focus on product development in the high-end instrumentation and medical/life science segments. 
  • Venture has secured six new customers in the networking & communications, retail store solutions/industrial and test & measurement/medical segments in 2015, which would contribute to growth in 2017 and beyond.

No bricks from Brexit. 

  • More than 80% of Venture’s customers are US-based technology and industrial companies, particularly those headquartered around Silicon Valley. About 50% of its products are shipped to the US, 40-45% to Asia Pacific and only 5-10% to Europe.

Future expansion centred on Penang. 

  • Venture has completed the acquisition of a huge 30.6-acre plot of land at Batu Kawan Industrial Park, Butterworth, Malaysia, for RM33.3m.
  • The property has a leasehold interest of 60 years. Batu Kawan is strategically located as it is linked to Penang Island by Penang Second Bridge. The land would be developed in stages starting 2017.


EARNINGS REVISION/RISK

  • We raised our 2016 net profit forecast by 3.7% due to the better performance in 1H16.
  • We maintain our earnings forecasts for 2017F.

VALUATION/RECOMMENDATION

  • Maintain BUY. 
  • Our target price is S$9.82, based on 16x 2017F PE (Benchmark Electronics: 17.2x, Plexus Corporation: 17.4x), justified by its average forward PE of 16.3x over the past 20 years.

SHARE PRICE CATALYST

  • Contributions from new products, particularly from the life sciences and industrial space.
  • Dividend yield of 5.6%, one of the highest in the technology sector.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-08
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 9.82 Same 9.820


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