Venture Corporation - CIMB Research 2017-04-28: 1Q17 A Good Start

Venture Corporation - CIMB Research 2017-04-28: 1Q17 A Good Start VENTURE CORPORATION LIMITED V03.SI

Venture Corporation - 1Q17 A Good Start

  • 1Q17 results in line; revenue growth aided by new products.
  • Test & Measurements (T&M)/Others segment now accounts for 52% of sales (1Q16: 39%) as new products have been included in this segment.
  • Cash from operations declined 93% yoy to S$7.0m in 1Q17.
  • 1Q17 effective tax rate was 19.0%. Management guided that effective tax rate could range between 17.0% and 18.5% going forward.
  • Target price raised to S$12.01, still based on 14.4x (10-year historical average) FY18F EPS. Downgrade to Hold from Add.

Strong quarter 

  • 1Q17 sales were above our and consensus expectations, at 28% of full-year estimates, while core net profit was in line, at 25% of our and consensus full-year expectations.
  • Still, we consider the 1Q17 results to be strong as this is seasonally a weaker quarter.
  • 1Q17 saw a higher effective tax rate of 19% as well as a 38% decline in depreciation and amortisation expenses.

Key takeaways from results 

  1. Venture gained further traction in new products which have been included in the Test & Measurement/Others segment, resulting in this segment accounting for 52% of sales in 1Q17 versus 39% in 1Q16. 
  2. Operating cash flow was affected by the need for higher inventories to support customers’ requirements and programmes. 
  3. The decline in depreciation and amortisation charges was due to the completion of the amortisation of customer relationships from a previous acquisition.

Outlook statement 

  • Venture noted that the group has started the year with positive momentum. Although there are uncertainties, the group will continue to focus on R&D initiatives, innovations in product and solutions development, and sustained operational excellence. 
  • Along with its healthy balance sheet and competent cash generation, the group is well positioned to seize emerging opportunities and to build sustainable and profitable growth.

Downgrade from Add to Hold 

  • We adjust for stronger sales growth in the T&M/Others segment and pencil in a higher effective tax rate of 18%. This leads to a 3.4-4.5% increase in our core EPS forecasts over FY17F-FY19F. 
  • At an unchanged 14.4x (10-year average) P/E multiple on FY18F core EPS, our target price rises to S$12.01. 
  • Given that the share price has priced in this higher growth, we downgrade Venture to Hold. 
  • Re-rating catalysts include stronger-than-expected business momentum while downside risk is order pullback by customers.

William TNG CFA CIMB Research | 2017-04-28
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 12.01 Up 11.500