Venture Corporation - CIMB Research 2017-08-07: Gaining Strength

Venture Corporation - CIMB Research 2017-08-07: Gaining Strength VENTURE CORPORATION LIMITED V03.SI

Venture Corporation - Gaining Strength

  • Venture Corporation (VMS) delivered excellent 2Q17 results, with earnings coming in above consensus/CIMB expectations at 32%/33% of full-year expectations. 1H17 formed 57% of CIMB FY17F.
  • Sales growth of 48.3% yoy in 2Q17 was driven by customers across all segments.
  • Net cash from operations improved to S$103m in 2Q17 (2Q16: S$33.6m; 1Q17: negative S$0.1m).
  • 2Q17 effective tax rate was lower at 17.3% versus 19.0% in 1Q17. Management said effective tax rate could be 17% from FY18 onwards (previous guidance: 17.0-18.5%).
  • Target price raised to S$15.80, based on 15.2x (10-year historical average) FY18F EPS. Upgrade from Hold to Add.

Another strong quarter 

  • 2Q17 sales were above our and consensus expectations, at 30% of full-year estimates.
  • Remarkably, 2Q17 revenue grew 48.3% yoy with strength in all product segments. Pretax profit margin at 8.3% was also the highest since 1Q11. Depreciation and amortisation expenses fell 32.1% yoy in 2Q17 while the effective tax rate was also lower at 17.3%.
  • Results would have been stronger if Venture had not made a prudent provision of S$2.1m for doubtful trade receivables.

Strong balance sheet 

  • The balance sheet remains strong with net cash at US$366.5m at end-Jun 17 vs. S$284.8m at end-Jun 16. Free cash flow generated during the quarter was S$96m.
  • Working capital position was S$904m as trade receivables rose in tandem with the revenue growth. 
  • Inventory position was S$670m at end-Jun 17 to support customers’ requirements and programmes.

Expecting stronger 2H based historical trend 

  • Given the positive momentum in the industry, Venture expects the historical trend of a stronger second-half to repeat in FY17F. Given its strong first-half performance, we expect consensus forecasts to be raised. 
  • We have raised our EPS forecasts by 21% for FY17F and 25% for FY17-18F as we factor in Venture’s new growth momentum and lower our tax rate assumption to 17% for FY18-19F versus 18% previously.

Outlook still positive 

  • Venture remains positive on its outlook. The company said that it has deepened its alliances and partnerships for value creation with leaders in technology ecosystems of interest. The group has also forged new collaborative alliances, culminating in new programmes and the ability to capture additional opportunities across its diversified customer base. 
  • Venture has also been able to seize new opportunities in several fast-growing adjacent ecosystems.

Upgrade to Add 

  • We upgrade our call on Venture to Add from Hold given the confirmation from its 2Q17 results that various programmes with existing and new customers are executing well. 
  • Our TP increases to S$15.80, based on 15.2x (updated 10-year average) FY18F EPS. 
  • Rerating catalysts include better-than-expected margins due to engagement in higher value-added products with customers. 
  • Key risk continues to be order pull-backs by customers.

Dividend optionality from Fischer Tech 

  • Venture has an 18.77% stake (10,466,666 shares) in SGX-listed Fischer Tech Ltd (Fischer Tech). The investment in Fischer Tech Ltd is held via wholly-owned Univac Precision Engineering Pte Ltd (Univac). Venture equity accounts its stake in Fischer Tech as Univac is able to exercise significant influence by virtue of its board representation and through participation in the decision making process at Fischer Tech Ltd.
  • Fischer Tech is currently undergoing a buy-out by a private equity firm, Platinum Equity Advisors (Platinum). Platinum’s offer for Fischer Tech is S$3.02/share.
  • Inclusive of the S$0.06 DPS that Fischer Tech’s shareholders are entitled to retain, the total offer price is S$3.08/share. Based on Univac’s 18.77% stake, Venture could receive gross proceeds of S$32.2m or S$0.11 per Venture share.
  • As the investment in Fischer Tech is equity accounted, Venture’s share of Fischer Tech’s book value was S$21.4m as at end June 2017. Platinum is paying 1.54x historical P/BV for Fischer Tech. As an approximation, the possible one-time gain (excluding the impact from any possible accounting treatment/adjustments) to Fischer Tech assuming the buy-out is completed by end Dec-17 is S$11.6m (54% gain on book value).
  • As for profit impact, we are forecasting associate contribution of S$2.5m and net profit of S$254.9m in FY17. The loss of associate contribution represents 1% of our net profit forecast.
  • We note that Venture has a history of paying a stable DPS of S$0.50 since FY04 (DPS was S$0.55 only in FY10 and FY11). 
  • In our view, Venture will continue to place priority on growing the company and we expect DPS to be stable at S$0.50. Dividend payout decisions are likely to be based on the cash generating performance of the company and growth needs. However, Platinum’s acquisition of Fischer Tech (if cash proceeds are received before FY17 results announcement) does provide special dividend optionality. The possible cash proceeds to be received by Venture represented 7.3% of its cash balance as at end June-17 and this percentage will decrease going into 2H17 as Venture generates even more cash.

Valuation and recommendation 

  • We value Venture at a P/E multiple of 15.2x on our FY18F EPS of S$1.04, deriving a target price of S$15.80. Venture’s updated 10-year historical forward average P/E multiple is 15.2x (previously 14.4x).
  • Based on our 3-year EPS CAGR of 22.7%, our target P/E translates into a PEG ratio of 0.67x. Amongst the peer group of US companies, only Benchmark trades at a higher P/E multiple of 19.2x FY18F. Benchmark’s CY17 ROE of 5.4% is less than half Venture’s 12.2% and while Venture will pay a dividend for CY17, whereas Benchmark does not (source: Bloomberg consensus).
  • Benchmark’s EPS CAGR is 16.2% versus Venture’s 22.7%. Benchmark’s 19.2x FY18 P/E multiple incidentally is equivalent to Venture’s +1 s.d. P/E multiple.
  • Investors with higher risk appetite and who are willing to pay for such a multiple would be looking at a potential target price of S$19.97. However, such investors should also note that growing a company that we project to hit S$3.9bn/S$255m in sales/net profit for FY17 will be no easy task. In the 25 years since listing in April 1992, Venture came close to reporting S$3.9bn revenue in FY07 and FY08.
  • As for net profit, the group neared the S$240m mark in FY06 and FY06 and the record net profit of S$300m was achieved in FY07.

William TNG CFA CIMB Research | 2017-08-07
CIMB Research SGX Stock Analyst Report ADD Upgrade HOLD 15.80 Up 12.010