Venture Corporation (VMS SP) - UOB Kay Hian 2016-10-06: Steady And Smooth Execution, Unruffled By Geopolitical Uncertainties

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VENTURE CORPORATION LIMITED V03.SI

Venture Corporation (VMS SP) - Steady And Smooth Execution, Unruffled By Geopolitical Uncertainties

• Venture’s execution is tracking slightly ahead of expectations as we move into the seasonally stronger 2H. The shift towards test & measurement and medical/life science products, which are gaining wider applications in food safety, environmental analysis and medical diagnostics, would have a positive impact on margins. 
• Customers are also attracted to Venture’s Malaysia operations, which offer cost-competitive EMS. 
• Maintain BUY with a higher target price at S$10.30.

WHAT’S NEW

Slightly ahead in terms of execution. 

• Venture’s operating performance is on track despite geopolitical uncertainties relating to Brexit and the US Presidential Election. Thus far, the run rates for production in July and August are slightly ahead of expectations.

Venture experienced meaningful pick-up in orders from some customers. 

• This augurs well for performance for 3Q16 as September is typically a seasonally stronger month.
• There is no visible impact from Brexit as shipments to Asia and the US remain steady. On the flip side, Venture benefitted as customers shifted more production to Malaysia, which offers more competitive pricing for electronic manufacturing services (EMS).

Shift in product mix towards test & measurement and medical/life science. 

• We see various opportunities for growth: 
  1. Expansion into filtration. US-based customer Danaher has acquired Pall, a manufacturer of air and water filters, which provides an opportunity for Venture to expand into the US$20b filtration market. Demand for advanced purification systems is driven by biomedical companies, who use them when producing biologics and drugs made from living cells. We believe the same technologies could also be applied to food processing and food quality.
  2. Trending towards environment and energy conservation. There is greater awareness to protect the environment due to global warming. Demand is increasing for instruments that measure critical parameters for air and water, such as purity and chemical composition. Venture also produces power inverters for ABB and smart metering devices for Elster (acquired by customer Honeywell) that reduce energy consumption.
  3. Clinical devices for healthcare applications. Singapore is a MedTech hub with a base of more then 30 MedTech companies who have set up commercial-scale production facilities. Venture is ISO13485 and FDA Regulation 21 CFR 820 certified. It has skilled R&D engineers to assist customers in product development. It benefits from growth at MedTech customers, such as Thermo Fischer/Life Technologies, Perkin Elmer and Illumina.

Potential positive impact from M&As. 

• Cavium has completed the acquisition of Venture’s key customer QLogic for US$1.36b or US$15.50/share. Cavium is a fabless semiconductor company offering processor and board level products targeting routers, switches, appliances, storage and servers. The acquisition allows Cavium to expand scale in data centre and storage markets.
• Venture is a longstanding supplier to QLogic. There could be new opportunities for Venture as Cavium does not actively outsource production.

STOCK IMPACT

Focus on creating value for customers. 

• Despite the difficult operating environment, Venture manages to generate growth by creating value for customers, so as to win new products and secure increased allocation. 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. 
• The stock is backed by net cash/share of S$0.56 as of Jun 16.

EARNINGS REVISION/RISK

• We have raised our net profit forecasts for 2016 and 2017 by 2.3% and 5.3% respectively due to margin expansion as Venture’s product mix shifts towards test & measurement and medical / life science.

VALUATION/RECOMMENDATION

• Maintain BUY. 
• We raised our target price from S$9.82 to S$10.30, based on 16x 2017F PE (Benchmark Electronics: 17.8x, 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 for Test & Measurement, Life Science and Industrial segments.
• Dividend yield of 5.4%, one of the highest in the technology sector.

Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-06

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 10.30 Same 9.820