Venture Corp - OCBC Investment 2017-11-06: R&D Drives Sustainable Margins Expansion

Venture Corp - OCBC Investment 2017-11-06: R&D Drives Sustainable Margins Expansion VENTURE CORPORATION LIMITED V03.SI

Venture Corp - R&D Drives Sustainable Margins Expansion

  • Impressive 3Q17 performance.
  • Broad-based revenue growth.
  • Reiterate BUY with S$23.00 FV.

9M17 above expectations and met 88% of our estimate 

  • Venture Corporation Ltd (VMS) once again surprised on the upside as 3Q17 PATMI surged 135.0% YoY to S$111.4m on the back of a strong 50.5% growth in revenue to S$1.06b.
  • Revenue growth was driven by a diversified revenue base, continuing strong execution of customers’ programmes and deepening of collaborative partnership with strategic customers. 
  • In-line with revenue growth, 3Q17 operating expenses grew 43.4% YoY to S$932.1m, attributable mainly to increase in changes in finished goods, work-in-progress and raw materials used, as well as employee benefits expense. 
  • For 9M17, VMS’ revenue grew 44.5% YoY to S$2.92b while operating expenses rose 41.3% to S$2.65b on similar reasons as 3Q17. Consequently, VMS’ 9M17 PATMI came in above our expectations as it jumped 81.5% YoY to S$229.8m, which formed 88.2% of our FY17 forecasts. 
  • 9M17 PBT and net margins improved remarkably by 2.0ppt and 1.6ppt to 9.5% and 7.9%, respectively, driven mainly by:
    1. management’s impressive execution of its strategy to create value by collaborating with customers through R&D support, and
    2. continuous efforts to increase productivity and efficiency in manufacturing lines.

4Q has always been the strongest quarter since FY12 

  • Looking ahead, we believe VMS’ margins expansion seen for 9M17 is sustainable as it continues to pursue its strategy of value creation for its customers by engaging in research and development (R&D) work alongside its customers. As a result, we expect VMS to continue to capture additional opportunities (e.g. new programmes across its existing customer base, new customers acquired etc.) to further grow its revenue, which will likely comprise higher proportion of design content. 
  • Since FY12, VMS’ 4Q earnings have consistently been the strongest in each financial year, and we expect this trend to continue in FY17.

Potential increase in dividend backed by strong cash flow 

  • On above expectations 9M17 and aforementioned reasons, we are raising our FY17–FY21 PATMI forecasts by 15%–20%.
  • Reiterate BUY on VMS as we increase our FV estimate from S$20.33 to S$23.00. 
  • Given its stellar YTD performance so far, we see much room for VMS to potentially raise its dividend, which has been S$0.50/year since FY08.

Eugene Chua OCBC Investment | 2017-11-06
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 23.00 Up 20.330