Venture Corporation - CIMB Research 2016-10-27: Rolling over

Venture Corporation - CIMB Research 2016-10-27: Rolling over VENTURE CORPORATION LIMITED V03.SI

Venture Corporation - Rolling over

  • Based on our channel checks, we believe Venture is on track for both qoq and yoy growth in 3Q16.
  • Longer term optimism reflected in the completion of the purchase of land in Penang, Malaysia.
  • We believe base DPS of S$0.50 is not at risk as Venture is unlikely to build factories aggressively in Penang (current utilisation rate of ~80-85% on 2 shifts).
  • Rolling over to FY18, our target price rises to S$10.57 (14.4x P/E, 10-year average).

Seasonally stronger 2H 

  • Venture’s business tends to be stronger in the second half. We believe that this pattern will continue in FY16. 
  • Based on our channel checks of its customers, although some customers have turned cautious, on balance most are still cautiously optimistic. As such, we expect Venture to see qoq and yoy growth in its 3Q16 results. 
  • Seasonally, Sep has historically also been a strong month for production.

Timely land acquisition

  • On 5 Jul, Venture announced the completion of the acquisition of one plot of land at Plot 318 Batu Kawan Industrial Park in Penang, Malaysia. This property has a leasehold interest of 60 years expiring on 18 Feb 2074 and was acquired for US$8m. In total, Plot 318 Batu Kawan Industrial Park has a land area of approximately 123,706 sqm.

Base DPS of S$0.50 not at risk 

  • We have assumed that Venture will adhere to its historical S$0.50 DPS. 
  • We believe that capex needs will remain manageable and Venture is unlikely to build aggressively in Batu Kawan as current utilisation rates are ~80-85%. 
  • We also note that in FY11-15, the average payout ratio was 98% against our 75.5% payout ratio in FY16F-18F implied by our S$0.50 DPS assumption.

Differentiation is working 

  • Venture’s focus on high-mix, high-value and complex electronic products is also showing results. 
  • We note that the Test & Measurement/Medical/Others segment accounted for 42% of sales in 2Q16 (24% in FY12). In this segment, we believe that Venture serves customers such as Thermo Fischer, Perkin Elmer, Illumina and Waters. These products have higher average selling prices, allowing Venture to offer higher margin services.

Upgrade to Add due to rollover 

  • Rolling over to FY18F, our target price rises to S$10.57, still based on 14.4x P/E, its 10- year average. Hence, we upgrade Venture from Hold to Add. 
  • Downside risk comes from order pullback by customers. 
  • Venture is well liked for its stable dividend payout, share price catalyst could come from higher dividends (Venture paid S$0.55 DPS twice in the last 12 years). 
  • One option to manage excess capital could be the retention of its well accepted base DPS of S$0.50 with a variable special dividend component.

William TNG CFA CIMB Research | 2016-10-27
CIMB Research SGX Stock Analyst Report ADD Upgrade HOLD 10.57 Up 9.520