Venture Corporation - CIMB Research 2017-07-04: Visible Growth Ahead

Venture Corporation - CIMB Research 2017-07-04: Visible Growth Ahead VENTURE CORPORATION LIMITED V03.SI

Venture Corporation - Visible Growth Ahead

  • Venture is a leading global EMS company focusing on high-value-added manufacturing.
  • 2Q17 results will be important in helping investors decide if Venture’s strong earnings growth in 4Q16/1Q17 can continue into the year.
  • We assume DPS of S$0.50 over FY17-19F.
  • Maintain Hold. Room for share price to re-rate higher will come primarily from stronger-than-expected earnings.

Leading EMS player 

  • Venture Corp was founded in 1984 and is a leading global provider of technology services, products and solutions with established capabilities spanning marketing research, design and development, product and process engineering, design for manufacturability, supply chain management as well as product refurbishment and technical support across a range of high-mix, high-value and complex products. 
  • Headquartered in Singapore, the group employs over 12,000 people worldwide.

Has the share price peaked? 

  • Year-to-date (YTD), Venture’s share price has gained 21%, reaching a YTD high of S$13.07 on 11 May 17. The share price corrected to a low of S$11.93 (-8.7%) recently, mirroring the tech stock sell-off on NASDAQ. We believe that 2Q17 results will provide critical information on whether the share price has peaked.

Share price driver #1: Could FY17 earnings surprise? 

  • Venture's net profit grew 17% yoy in FY16. The double-digit net profit growth continued into 4Q16 and 1Q17. In 4Q16, net profit grew 21% yoy and in, 1Q17, net profit growth was 36% yoy. 
  • Typically, for tech manufacturing services companies, the second-half tends to be stronger. As such, with 2Q17 results, investors will have a better sense of whether the strong earnings growth can continue into the year.

Share price driver #2: M&As Venture is in a net cash position. 

  • We believe the company is open to acquiring suitable candidates with the right technology or collaborating with potential emerging winners in their segments. 
  • Although its fragmented shareholding could invite take-over interest, investors should note that Venture’s market cap is US$2.5bn.

Share price driver #3: Dividends 

  • Venture started to pay S$0.50 in DPS in FY04. In the past 13 years, this was the DPS except for two consecutive years, FY11 and FY12, when the DPS was raised to S$0.55.
  • While investors may clamour for more dividends, we note there are competing uses for the cash: 
    1. possible M&As, 
    2. capacity expansion for Penang, and 
    3. requirement to carry higher inventory levels to support customers’ programmes.

Maintain Hold 

  • We maintain our Hold call on Venture. Our valuation basis is unchanged at 14.4x (10- year average) P/E on FY18F core EPS. 
  • An upside risk to our target price is stronger-than-expected earnings growth while downside risk is order pullback by customers. 
  • Its dividend yield of 4.13% lends share price support.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-07-04
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 12.010 Same 12.010