Venture Corporation - CIMB Research 2018-04-26: Even A Good Company Cannot Fight Market Sentiment

Venture Corporation - CIMB Research 2018-04-26: Even A Good Company Cannot Fight Market Sentiment VENTURE CORPORATION LIMITED V03.SI

Venture Corporation - Even A Good Company Cannot Fight Market Sentiment

  • Venture Corporation's 1Q18 revenue grew by 1.5% y-o-y and formed 18.7% of our full-year forecast, below the 5-year historical average of 22.5%.
  • 1Q18 core net profit at 19.1% of our full-year forecast was in line with the 5-year historical average of 19.3%.
  • Cash generation continues to be strong. Net cash from operations was S$28.2m in 1Q18 versus negative S$134,000 in 1Q17.
  • Net profit margin for 1Q18 was 9.8% versus 5.8% in 1Q17 and 13.2% in 4Q17. 1Q18 effective tax rate was lower at 15.1% versus 19.0% in 1Q17.
  • Target price cut to S$25.64 as we revert to its 11-year average P/E of 15.4x as our valuation basis (previously 17.7x).

Seasonal weakness

  • Venture Corp's 1Q18 sales were below the 5-year historical average of 22.5% contribution to full-year turnover. 
  • Sales grew by just 1.5% y-o-y due to the weaker US$ versus the S$. Venture disclosed that in US$ terms, 1Q18 revenue would have grown by 9.1% y-o-y. 
  • Net profit growth of 72.2% y-o-y was attributed to value creation efforts, operational excellence and judicious cost management.

Key takeaways from the results

  • Venture highlighted that the group has more than 100 very active customers and has various risk management committees to deliberate and monitor its risk exposure to customers and products. For some customers, Venture could be working on multiple product lines with the same customer. 
  • The company’s key strategy remains focusing on early customer involvement, understanding the potential total addressable market of customers and creating value for customers in a cost effective way.

The company’s long-term strategy

  • Venture commented that the group will continue to leverage its core capabilities in engineering, advanced manufacturing and supply chain management to drive operational excellence and deep value creation. 
  • Venture also plans to grow its pool of strategic partnerships and technological diversity with expansion into new and adjacent ecosystems.

Maintain ADD

  • We attempt to factor in the negative impact of the weaker US$ into our FY18-20 revenue forecasts, leading to 4.3-4.5% cuts in core EPS. 
  • Given the current poor sentiment and concerns over earnings growth for tech manufacturing services companies arising from the trade/tech tensions between the US and China, valuations are likely to revert to the historical mean. As such, we now value Venture at 15.4x (11-year average P/E) instead of 17.7x previously. Our Target Price falls to S$25.64. 
  • Re-rating catalysts include stronger-than-expected business momentum while downside risk is a pullback in orders by customers.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2018-04-26
SGX Stock Analyst Report ADD Maintain ADD 25.64 Down 30.810