Venture Corporation - DBS Research 2018-03-01: Prospects Burning Bright

Venture Corporation - DBS Vickers 2018-03-01: Prospects Burning Bright VENTURE CORPORATION LIMITED V03.SI

Venture Corporation - Prospects Burning Bright

  • FY17 a trophy year for Venture as profit more than doubled to S$372.8m, and is set to grow further.
  • Margin expansion featured strongly in 4Q17, reflecting Venture’s growing value-add and unique capabilities.
  • Higher DPS of 60 Scts for FY17 could be repeated if strong earnings momentum and cashflows are sustained.
  • Maintain BUY with revised Target Price of S$32.20.



The trend is set. 

  • Venture’s 4Q17 earnings beat market expectations once again as net profit surged over 164% y-o-y and c.28% q-o-q to a record S$142.9m. Growth was likely to have been broad-based as the bulk of Venture’s customers are still on growth mode.
  • Fueled by positive industry backdrop and excellent execution, Venture’s share price has gained > 150% over the past year but we believe there is still room to run as it continues to deliver superior earnings performance.
  • Margin improvement was the key story in FY17 and demonstrates the group’s continued success in value-creation through increased design content and uniqueness in the broader Electronic Manufacturing Services (EMS) space, with exposure to attractive end-markets such as genome sequencing and networking and communications. 
  • Expectations of double-digit growth at key industry clusters provides strong visibility for Venture’s revenue growth prospects.


Where We Differ:

  • We have assumed higher earnings potential vs consensus as we remain positive on Venture’s growth trajectory, and believe the market has yet to fully price in the group's unique offerings, 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 near term catalysts. 
  • In the medium to long term, acquisition of companies along the manufacturing value chain could increase Venture’s capabilities.


Valuation


Maintain BUY with a revised Target Price of S$32.20. 

  • We raise our Target Price to S$32.20 on the back of higher earnings estimates driven by better sales and margin expectations, still pegged to a target PE multiple of 19.5x on blended FY18/19F earnings, which implies around 10% premium to peer average of 17.5x forward PE.


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.



WHAT’S NEW - Venture’s 4Q17 earnings was a strong finish to FY17; Dividend raised to 60 Scts per share (vs 50 Scts historically) 


4Q17 – Venture’s strongest quarter yet; Beats consensus estimates by >30%. 

  • Venture continued to wow in 4Q17. Net profit surged 28% q-o-q and c.170% y-o-y to a record S$142.9m (or S$131.7m excluding contributions from Fischer Tech) on quarterly revenue of S$1,086.5m, beating our/consensus estimates by 31%/33%, respectively. 
  • On a full year basis, revenues of S$4 bn were in line while profit of S$372m outperformed market expectations by over 10%.
  • While the earnings beat was driven by several factors, we observe that performance trends have remained broadly similar to previous quarters and continue to attribute Venture’s strong showing mainly to
    1. steady sales momentum, and
    2. margin improvement. 
  • Overall, growth was likely to have been broad-based as the bulk of Venture’s customers – over 75% - are currently on growth mode.

Strengthening margins a reflection of Venture’s strengths.

  • Venture’s margin expansion story featured strongly in FY17, particularly in 4Q17 as EBIT and net margins strengthened significantly on a sequential basis from 12.3% and 10.5% in 3Q17 to 15.4% and 13.2% in 4Q17, respectively. Excluding the one-off gain from its disposal of Fischer Tech, net margins in 4Q17 would have been slightly lower at c.12.1%, but still impressive.
  • Apart from improved efficiencies, the steady expansion in margins remain supported by an improved sales mix featuring higher design content, and reflects Venture’s growing valueadd to its partners and strong delivery on increasingly complex solutions – a trend that is set to continue going forward.

Capex investments to grow as Venture prepares for next stage of growth, from S$37m in FY17 to c.S$50m for FY18F.

  • Further, a recent acquisition of a 182,405 sqft manufacturing site in the US, which lies within the prime Silicon Valley catchment area, suggests that bigger plans and opportunities lie ahead.
  • R&D expense trending higher, implying rising R&D activity levels as some of these ongoing projects with higher design elements (and thus higher margins) could be converted into commercial projects later on.

Higher 60 Scts dividend a new normal? 

  • On the back of strong results and divestment gain from Fischer Tech, Venture declared a higher dividend of 60 Scts for FY17 vs 50 Scts historically. 
  • Net cash balance was boosted by over 50% y-o-y to S$752.4m as at end-FY17, and is more than sufficient for the group’s upcoming expansion needs. With earnings having grown to sustainability higher levels and operating cash flows likely to remain strong, we believe the higher 60 Sct dividend proposed for FY17 could be repeated in FY18F (and beyond).

Maintain BUY with higher Target Price of S$32.20. 

  • We continue to like Venture, which stands out for its unique positioning as an enabler of high-tech, complex products and solutions, plus proven track record. Supported by still-positive industry backdrop, expectations of broad-based growth across its diversified client pool and imputing benefits of resultant operating leverage, we raise our earnings projections for FY18F/19F by 20%/27%.
  • Pegged to a target PE multiple of 19.5x on FY18/19F earnings, we arrive at a revised Target Price of S$32.20 for Venture.




Carmen Tay DBS Vickers | Suvro Sarkar DBS Vickers | http://www.dbsvickers.com/ 2018-03-01
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 32.20 Up 26.000



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