Venture Corporation - CIMB Research 2016-12-05: Better earnings quality

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VENTURE CORPORATION LIMITED V03.SI

Venture Corporation - Better earnings quality

• We believe Venture will continue to reap the benefits of its past engagements with customers who value its ability to value add to their products.
• Better earnings and higher free cash flow could lead to a dividend surprise versus consensus expectations.
• Maintain Add with a P/E-based (14.4x FY18F, 10-year average P/E) target price of S$10.94.

Earnings momentum to continue 

• We expect profit growth to outpace revenue growth as Venture focuses on servicing customers that need Venture’s higher profit margin capabilities.
• Margin expansion was also evident in the 3Q16 and 9M16 results.
• As highlighted previously, FY17F earnings will also be aided by the cessation of the amortisation of intangibles (only US$5.3m amortisation left).

Possible dividend upside

• Venture’s balance sheet remains strong with a net cash of US$244m as at end-3Q16 versus US$206m as at end-2Q16.
• Its working capital position similarly improved to US$540m at end-3Q16 versus US$519m in 2Q16. Free cash flow for the quarter was US$33.7m and free cash flow generated for 9M16 was US$114m, up 38.4% yoy.
• With better earnings and strong free cash flow, Venture could surprise analysts’ expectations of S$0.50 DPS.

New growth drivers

• The return of its better earnings performance and margins have been driven by years of engagement with customers that are less price sensitive and are able to reward partners that can provide value-add. 
• Today, medtech, life sciences and 3D printing are the new opportunities for Venture.
• We note that its Test & Measurement/Others segment, in which most of this new demand is classified, has grown from 28% of revenue in 1Q13 to 44% of revenue in 3Q16.

Risks

• Order pullbacks by customers.
• Re-shoring of manufacturing by American OEM customers.
• Succession risk. Chairman and CEO, Mr Wong, is around 74 years old.

Maintain Add

• We maintain our Add call and target price (14.4x FY18F P/E, 10-year average P/E).
• Our base DPS assumption remains at S$0.50 but we note that the company has the ability to raise DPS.
• Given the weak economic outlook, we believe there could be accretive M&A opportunities for Venture in FY17.
• Re-rating catalysts include better-than-expected margins due to engagement in higher value-added products with customers.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-12-05

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 10.940 Same 10.940