Venture Corporation - DBS Research 2017-10-06: Poised For Continued Growth

Venture Corporation - DBS Vickers 2017-10-06: Poised For Continued Growth VENTURE CORPORATION LIMITED V03.SI

Venture Corporation - Poised For Continued Growth

  • Strong growth momentum expected to continue into FY18 on the back of strong demand for end-user products and better margins.
  • CEO’s share purchases a positive sign.
  • Potential for at least 10% increase in dividends to S$0.55/share (which was paid back in FY2010 – FY2011).
  • Maintain BUY, revised Target Price of S$21.00.

Expect strong growth momentum to continue amidst CEO’s share purchases. 

  • In the recent quarter, Venture announced a historical-high quarterly performance. The company has demonstrated consistent revenue growth (on a y-o-y basis) for the last 15 quarters. 
  • With earnings growth trajectory gaining momentum over the last five quarters due to its exposure in attractive end-markets such as genome sequencing and networking and communications, we believe that the strong growth momentum is likely to continue amidst its CEO’s share purchases in the open market since July. 
  • We maintain our BUY call with a revised Target Price of S$21.00 as we believe the earnings growth prospects and potential dividend upside are attractive attributes.

Where we differ: 

  • We currently have the highest Target Price on the street. 
  • We remain positive on Venture’s growth trajectory and believe the market has yet to fully price in the company's growth potential given its unique offerings, superior technology know-how and hard-to-replicate ecosystems.

Potential catalysts: 

  • New products and continued expansion into non-traditional markets with higher margins, and new customer acquisitions are potential catalysts. 
  • In the medium term, acquisition of companies along the manufacturing value chain may increase Venture’s capabilities. 
  • In the long run, adoption of new enabling technologies and applications at the commercial level could re-rate the stock further.

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 revenue growth.


Strong growth momentum expected to continue into FY18 amidst CEO’s share purchases 

Expect strong growth momentum to continue. 

  • Venture’s growth momentum (y-o-y basis) has been picking up since 4Q16. We expect the strong growth momentum to continue into the next few quarters as Test & Measurement, Medical & Life Sciences, and Others segment continue to lead Venture’s growth, contributing to close to half of Venture’s revenue.
  • New products in the genome sequencing space launched in 2017, which have reportedly exceeded prior sales expectations in the last quarter by ~30%, should continue to add to Venture’s top line. 
  • Networking & Communications, which saw 13% y-o-y growth in FY16 and contributed to 19% of Venture’s topline, is another growth area that should benefit from increased adoption of optical components. We note that major players in this space are guiding double-digit growths in the range of 15% - 20% for the upcoming quarter, citing robust content gains and seasonal strength for wireless segments. It is believed that 5G wireless, data center needs, amongst others will continue to drive the broad demand for networking & communications solutions in the upcoming quarters. 
  • We note that EMS players have largely re-rated across the board, mostly due to strong order wins across various industries. Cross-checking to Venture’s EMS peers, we also note the following guidance (q-o-q growth) in the upcoming quarter for various broad industries and this supports our expectations of continued strong growth momentum going forward.
  • We note that Venture is currently working on new segmental disclosures.

Potential dividend upside. 

  • In our previous note, we mentioned the possibility of dividend upside. We continue to believe that this is likely, given Venture’s strong earnings growth. 
  • Venture has been paying S$0.50/share dividends since FY2012 and we believe there is potential for dividends to be raised by at least 10% to S$0.55/share in FY17F. Based on our Target Price, this translates into ~2.5% dividend yield.

Better margins ahead. 

  • In 2Q17, Venture posted its highest net margin of 6.9% since 2011. We believe that Venture’s tactical decision to evolve its business mix into high mix low volumes has borne fruit and expect margins to expand going forward. 
  • We have revised our full-year net margin to 6.7% in view of higher margin expectations.

CEO’s share purchases a positive sign. 

  • CEO Mr Wong purchased Venture’s shares in the open market on two occasions separately, for a total consideration of > S$8m, on top of other share options exercised during the year. 
  • Mr Wong’s stake in Venture has since increased to 7.08% as of 12 September 2017. We believe that this is a positive sign, demonstrating management’s confidence in Venture’s growth trajectory.

Maintain BUY with revised TP of S$21.00. 

  • We maintain our BUY call with revised Target Price of S$21.00 as we revise our earnings on higher revenue expectations and better margins, particularly due to stronger-than-expected end-user demand on new products in the genome sequencing space and continued growth in the networking and communications segment. 
  • Our revised Target Price of S$21.00 is based on FY18/19F earnings pegged to a PE multiple of ~20x, attributing 5% premium on PE multiple of 18.5x on FY18/19F earnings, the average forward PE for high-mix low-volume Electronic Manufacturing Services (EMS) peers. 
  • We note that Venture’s 5-year historical mean PE valuation is ~19x. We believe the 5% premium is justified due to Venture’s ability to deliver higher margins compared to its peers and steady dividend payout.

Singapore Research Team DBS Vickers | Suvro SARKAR DBS Vickers | 2017-10-06
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 21.00 Up 16.600