Venture Corp - OCBC Investment 2018-04-26: Don’t Fret Over A Speed Bump

Venture Corp - OCBC Investment 2018-04-26: Don’t Fret Over A Speed Bump VENTURE CORPORATION LIMITED V03.SI

Venture Corp - Don’t Fret Over A Speed Bump

  • Decent 1Q18 results.
  • Price correction overdone.
  • Positive outlook intact.

1Q18 revenue growth dragged by weaker USD

  • Venture Corporation Ltd (VMS) delivered a decent 1Q18 results despite a lacklustre 1.5% growth in revenue to S$856.0m due to weakened USD. In USD terms, revenue growth would have grown by 9.1% instead. 
  • However, 1Q18 operating expenses declined 3.2% y-o-y to S$759.5m, attributable mainly to decrease in changes in finished goods, work-in-progress and raw materials used, as well as other operating expenses. As a result, 1Q18 PATMI came in within expectations as it surged 72.2% y-o-y to S$83.7m, and formed 19% of our FY18 forecast. 
  • Note that first quarter has historically been the weakest quarter since FY13. 
  • VMS’ margins continued to expand in 1Q18 as PBT margin and net profit margin rose 4.4ppt and 4.0ppt to 11.5% and 9.8%, respectively.

Concerns over slowdown in PMI’s IQOS device sales

  • After Philip Morris International (PMI), a customer of VMS, commented during its 1Q18 analyst call that its IQOS (smoke-free electric cigarette) devices in Japan recorded slower-than expected growth in sales, VMS’ share price has since plunged ~22% (based on closing prices between 19 Apr 18 and 25 Apr 18). 
  • Philip Morris International attributed the slowdown in IQOS growth to saturating the early adopters and innovators earlier than expected, and slow adoption by the segment in their 50s, which represents ~40% of the smoker population in Japan. That said, Philip Morris International management commented that it is an issue of speed of growth and not decline in sales, and reiterated Philip Morris International remains on track to meet their full-year sales target for IQOS. 
  • We estimate Philip Morris International contributed ~10% of VMS’ FY17 revenue. Hence, it seems unjustifiable for the plunge in VMS’ share price, which suggests wiping out more than Philip Morris International’s contribution to VMS.

Not everything is about PMI

  • On above-mentioned reasons, we pare our FY18F/19F EPS estimates by 6%/6%. Consequently, our Fair Value declines from S$34.00 to S$30.00 as we also adjust our DCF-based assumptions with the backdrop of weakened USD against SGD and higher interest rate environment ahead. 
  • All considered, coupled with solid balance sheet, we remain positive over VMS’ broad-based growth outlook supported by sustainable margins, as it continues to pursuit and create value through deep collaboration with customers.

Eugene Chua OCBC Investment | 2018-04-26
SGX Stock Analyst Report BUY Maintain BUY 30.00 Down 34.000