Venture Corporation (VMS SP) - UOB Kay Hian 2016-11-07: 3Q16 Not A Flash In The Pan

VENTURE CORPORATION LIMITED V03.SI

Venture Corporation (VMS SP) - 3Q16 Not A Flash In The Pan

Venture reported an outstanding set of results characterised by significant margin expansion, boosted by growth from high-margin test & measurement and medical & life science products.
With EPS for 9M16 already at 45.5 S cents and for full-year 2016 estimated at 63.4 S cents, we expect Venture to be able to raise DPS from 50 S cents to 55 S cents.

Venture reported outstanding 3Q16 results with net profit at S$47.4m (+16.9% yoy), against our forecast of S$43.8m. The results could be even better if not for inventories write-off of S$4.1m.

Test & measurement/medical segment expanded 25.3% yoy and 8% qoq. Venture benefitted from a favourable shift towards highmargin test & measurement/medical segment, which accounted for 44.1% of revenue (3Q15: 35.8%). We believe Venture executed well for Keysight and Waters for test & measurement products, and for Thermo Fischer, Perkin Elmer and Illumina for medical/life science products. Its Networking & Communications segment also grew 13.6% yoy.
Conversely, Venture has scaled down revenue from legacy Computer Peripherals & Data Storage and Printing & Imaging segments, which declined 31.3% and 41.3% yoy respectively. The two segments provide high volume but margins are typically lower.

Gross margin expanded by 2.1ppt yoy and 1.6ppt qoq to 23.6%. Staff costs increased 8% yoy as Venture invested in and rewarded its engineering talents.
Net margin gradually inched higher from 5.7% in 1Q16 to 6.4% in 2Q16 and 6.7% in 3Q16, and is above its targeted net margin of 6-8% for the second consecutive quarter.

Working capital shrank by S$66.7m yoy to S$747.8m due to improved collection of receivables and stretching out payables.
Free cash flow was S$181.3m during 9M16, up 35.7% yoy. The improved free cash flow translated to higher net cash of S$337m or S$1.21/share.

Venture’s recent string of good results is not a flash in the pan or an overnight success. It involved a disciplined and concerted strategy to generate sustainable growth. Venture has diligently worked hard on three core pillars in its strategic blueprint:
1. Venture builds know-how in selected technology domains, such as high-end instrumentation, medical & life science and networking & communications. It collaborates with partners, who are leaders in their respective field, to deliver the best in class services and total solutions within these selected technology domains.
2. Venture focuses on value creation, ie the relentless pursuit to analyse every segment of the value chain and how best to add value to customers. The emphasis is on generating value for customers and helping them achieve their business objectives, so as to get rewarded with more business and sustainable margins.
3. Venture utilises Kaizen and lean manufacturing to enhance cost efficiency and ensure a culture of continuous improvement.
While many companies could elucidate similar management mantra, Venture differentiates itself through flawless execution.

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. 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.

Venture was able to grow despite adversarial and uncertain operating environment.
Management sees opportunities in the increase in electronics-content in cars, factories, hospitals and even buildings. There are also opportunities in Internet of Things and Smart Nation initiatives.

We have raised our existing earnings forecasts for 2016 by 3.8% and for 2017 by 6.4% due to the sustainable improvement in margins.

Maintain BUY. Our target price for Venture of S$11.00 is based on 2017F PE of 16x (Benchmark Electronics: 18.2x, Plexus Corporation: 14.0x), justified by its average forward PE of 16.3x over the past 20 years.
We gauge that Venture could afford to increase dividend payout from 50 S cents/share to 55 S cents/share for 2016 due to the resurgence in growth. We estimated dividend payout ratio at an affordable 86.8%.

Contribution from new products, particularly from the Life Sciences and Industrial space.
Dividend yield of 5.8%, one of the highest in the technology sector.

Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-07

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 11.00 Up 10.300