Venture Corporation - DBS Research 2017-05-02: Venturing At A Good Pace

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VENTURE CORPORATION LIMITED V03.SI

Venture Corporation - Venturing At A Good Pace

• Strong growth momentum likely to continue.
• 1Q17 net profit was c.20% above our expectations.
• Changing business mix to support healthy margins.
• Maintain BUY with revised TP of S$14.30.

Strong growth momentum likely to continue. 

• Venture has demonstrated consistent revenue growth (on a y-o-y basis) for the last 14 quarters. With earnings growth trajectory gaining momentum over the last four quarters, we believe that Venture's efforts to grow in new niche segments has come to fruition. 
• Market leaders in attractive end markets that Venture has exposure to, such as genome sequencing and optics, have also posted double digit revenue growth guidance for the year.
• Venture’s fixed dividend commitment of 50 Scts (~4% yield) coupled with > 10% earnings growth prospects in FY17F is attractive in our opinion and we retain our BUY call.

1Q17 net profit was above our expectations. 

• Net profit was > 20% above our expectations. Net profit of S$48.6m (+35.5% y-o-y, -10.1% q-o-q) was >20% above our expectations. 
• Historically, 1Q is a seasonally weak quarter, in part due to Chinese New Year plant shutdown. However, revenue continued to be boosted by order wins from existing customers and products. 
• The growth was largely in the Test, Measurement, Medical and Life Science segment, which commands superior margins.

Working capital 3.6% higher q-o-q due to higher inventories.

• Working capital of S$875.1m (+25.1% y-o-y, +3.6% q-o-q) was higher q-o-q as more inventories were held to support customers’ requirements and programms. Accordingly, Venture charges a fee for holding inventories on customers’ request.

Strong growth in Test, Measurement, Medical and Life Science and Others segment. 

• The Test, Measurement, Medical and Life Science and Others segment contributed 52.1% to Venture’s revenue (FY16: 43.3%), lifting revenue and earnings growth for the quarter due to its superior margins. We believe the tactical switch to a high mix low volumes strategy and diversification into new segments since 2009 has paid off. 
• Today, Venture has capabilities in areas such as 3D printing, mass spectrometry, genome medicine, optical component devices among others. We look forward to new high-technology segments that Venture has embarked on in the upcoming quarters.

Changing business mix to support healthy margins; maintain BUY with a revised TP of S$ 14.30. 

• Venture's evolving business mix, with increasing contribution from the Test, Measurement, Medical and Life Science segments and declining contribution from computer peripherals and printing, is likely to sustain its gross margins. 
• We revised up our revenue estimates, resulting in 1.5%/2.8% upward revisions to our FY17/FY18F earnings. Consequently, we revise up our TP to S$14.30. 
• Our TP is based on 18.6x blended FY17F/FY18F PE, based on Venture’s 4-year historical PE average. This is supported by 18.9x average of forward PE for high mix low volume peers. 
• Fixed dividend commitment of 50 Scts (~4% yield) coupled with > 10% earnings growth prospects in FY17F is attractive in our opinion and we retain our BUY call.

Key Risks to Our View

• Weakening global growth prospects. A broad global slowdown is likely to impact Venture due to its vulnerability to business cycles. 
• Potential weakening of the USD could also dampen growth in revenues.

Sachin MITTAL DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-05-02

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 14.30 Up 11.370