Venture Corporation - CIMB Research 2017-11-03: The Re-rating Continues

Venture Corporation - CIMB Research 2017-11-03: The Re-rating Continues VENTURE CORPORATION LIMITED V03.SI

Venture Corporation - The Re-rating Continues

  • Venture Corporation (VMS)'s 3Q17/9M17 revenue was in line at 27%/75% of CIMB and consensus FY17 forecasts.
  • 3Q17/9M17 net profit was above at 43%/88% of CIMB and consensus FY17 forecasts due to better-than-expected margins.
  • 3Q17 was notable for the continued strong yoy revenue growth of 50.5% and the second consecutive quarter of generating more than S$1.0bn revenue.
  • Pre-tax margin expanded to 12.4% in 3Q17 (8.0% in 3Q16). We raise our FY17-19 EPS forecasts to reflect the better margin.
  • Our TP rises to S$24.74, still based on 17.3x FY19F EPS (0.5 s.d. above its 10-year historical average of 15.2x). Maintain Add.

3Q17 – record margins 

  • Venture Corp's 3Q17 revenue was S$1.1bn, up 50.5% yoy, and the second consecutive quarter of revenue exceeding the S$1.0bn mark. 
  • While these achievements were impressive, the feather in the cap was the margin expansion. Pre-tax margin expanded by 4.4% pts to a record 12.4% in 3Q17 vs. 8.0% in 3Q16. A lower effective tax rate of 15.2% in 3Q17 vs. 16.3% in 3Q16 helped to shore up net profit margin to 10.5% for the quarter.

Excellent working capital management 

  • Working capital management was similarly impressive with the cash cycle (based on quarter-end data) at 95 days for 3Q17 vs. 98 days in 2Q17. Trade receivables days were shortened from 73 days in 2Q17 to 69 days in 3Q17. 
  • Operating cashflow before working capital changes was S$153.5m for 3Q17. Net cash from operations in the quarter was S$173.6m. 
  • Venture remains in a net cash position as at end-Sep 17.

Raising the bar for long-term net profit margin 

  • Venture has raised its long-term net profit margin aspiration to 6-10% vs. a 6-8% range for the past few years. 
  • Venture’s results demonstrate that it has crossed a chasm to becoming an EMS ++ (Electronic Manufacturing Services) company where it seeks to create a win-win interdependence partnership with its customers. 
  • We understand that in 3Q17, more than 65% of the revenue was from products in which Venture was able to offer some design content.

4Q17 performance could mirror 3Q17 

  • We believe that Venture’s strong performance could continue in the fourth quarter given the generally positive results from US tech companies and as most of its customers are still experiencing growth. 
  • Venture remains committed to forging deeper and mutually beneficial collaborative partnerships and alliances across its diversified portfolio of ecosystems of interests, and plans to scout for partners who are typically leaders in fast-growing technology.

Higher margin assumptions drive our TP upgrade 

  • Our new forecasts reflect the company’s margin improvement and new long-term margin aspirations. These higher margin assumptions drive our 16.4-26.9% increase in FY17-19 EPS forecasts. 
  • Our target price rises to S$24.74, with our P/E multiple target unchanged at 17.3x (0.5 s.d. above its 10-year historical average of 15.2x). 
  • We also raise our DPS forecasts across FY17-19F to S$0.60 from S$0.50 previously given the strong free cashflow generation. 
  • Downside risk is a slowdown in customer orders.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-11-03
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 24.74 Up 20.870