Venture Corporation (VMS SP) - UOB Kay Hian 2018-04-26: 1Q18 Barely Within Expectations; Lack Of Clarity To Fuel Share Price Weakness

Venture Corporation (VMS SP) - UOB Kay Hian 2018-04-27: 1q18 Barely Within Expectations; Lack Of Clarity To Fuel Share Price Weakness VENTURE CORPORATION LIMITED V03.SI

Venture Corporation (VMS SP) - 1q18 Barely Within Expectations; Lack Of Clarity To Fuel Share Price Weakness

  • Venture reported a 1Q18 net profit of S$83.7m, forming 18/19% of UOBKH/consensus earnings forecasts, barely within expectations despite seasonality.
  • One positive was the above-average GPM of 16%, though the sharp q-o-q revenue drop-off suggests a production drop-off.
  • Management did little to address issues raised in the short sell report, and weakened sentiment has resulted in a multiples de-rating.
  • Lower 2018-20 earnings forecasts by 3-4%. Maintain BUY but lower target price to S$25.00 (16.1x 2018F PE).



RESULTS

  • 1Q18 net profit of S$83.7m, barely within expectations. Venture Corporation’s (VMS) headline net profit of S$83.7m (+72% y-o-y, -41% q-o-q), forming 18%/19% of UOBKH/consensus full-year estimates, was slightly below expectations. The first quarter for VMS is seasonally weak, typically accounting for 19-21% of full-year earnings.
  • Minimal impact from ZTE. Management was kind enough to share that their exposure from ZTE through Oclaro was almost negligible to bottom line.
  • Quarterly drop in revenue suggests drop-off in production. Revenue showed a steep drop-off of 21% q-o-q to S$856m. The weaker revenue was remarked as having been a result of seasonal factors, though the steep drop-off suggests that whichever product line’s production that drove the 2H17 production ramp-up had fallen to lower levels going into 1Q18.
  • 1Q18 GPM rose to 16.3%, uplifted by R&D revenue. The higher y-o-y earnings was attributed to gross profit margin (GPM) rising to 16.3% (+4.4ppt y-o-y, -1.9ppt q-o-q), attributed to what management remarked as contributions form “higher valued-added items”. R&D revenue was also recognised during the quarter, providing a small uplift to GPM.


STOCK IMPACT

  • Parallels with XIA’s guidance might not be the case. To some extent, excluding R&D revenue recognised, VMS’ quarterly revenue profile bears some similarity to Xiamen Intretech’s (XIA, 002925 CH) quarterly revenue profile. Considering the lower production outlook that XIA is reporting for 2Q18, there are some concerns as to whether VMS will be similarly impacted. Management suggested that it was possible that they had more than one supplier for the component, thereby implying that parallels should not be drawn with them.
  • Little feedback from management on short seller report. VMS’ management did little to alleviate concerns raised by a recent short seller report, beyond remarking that they found the points raised to be false. The lack of disclosure and re-assurance from management will continue to mire the stock in uncertainty. With no clear guidance on what is factually accurate, share price will likely remain volatile.
  • Earnings visibility only likely in 2H18. As usual, management did not comment on the growth outlook, citing client confidentiality However, a remark was made that the test & measurement /medical (T&M/Medical) segment will see a moderation in growth versus 2017. With order visibility of about 3-6 months, it is likely that clarity on VMS’ order outlook will only manifest going into 2H18.
  • Broad-based growth in T&M/Medical and Network/Communication segments to continue. We note that its clients in the key T&M/Medical segments such as Agilent, Keysight and Thermo Fisher are expecting strong revenue growth, with consensus forecasting 10-16% y-o-y growth for all three clients. Networking and communication is also expected to see strong double-digit revenue growth, driven by Broadcomm. These will likely be the key focus for growth post the unexpected demand slowdown for IQOS in Japan.
  • IQOS production to be clearer going into 2H18. The production outlook for IQOS will be clearer going into 2H18 as we look for signs that other countries and the US FDA approval to take up the slack in Japanese demand. In the meantime, there is a risk of 1H18 being a soft patch, and we caveat the risk of VMS losing market share to the second supplier due to the former’s higher pricing.
  • Multiples de-rating likely in place due to lack of clarity. Sentiment has been severely damaged by the short seller report. With management unable to clear the air on issues raised, the market will likely de-rate VMS’ valuation until greater clarity is achieved.


EARNINGS REVISION/RISK

  • Lower 2018-20 earnings forecasts by 3-4%. We lowered our earnings forecasts by 3- 4% to account for the weaker 1Q18 earnings. Our revised 2018-20 earnings forecasts are now S S$442m (-4%), S$474m (-3%) and S$515m (-3%).


VALUATION/RECOMMENDATION

  • Maintain BUY on lowered 16.1x 2018F PE target price of S$25.00. Our target price of S$25.00 is pegged to 16.1x 2018F PE, representing the implied 1-year forward PE based on a regression of VMS’ P/B against ROE over 2001-2017. Share price will likely face near-term pressure as investors struggle to absorb over the veracity of facts being tossed around in the market. 
  • Over the longer term as facts become clear and the broad-based growth in the T&M/Medical segment manifest, we expect valuation to move back up to its fair value. We maintain BUY on a valuation basis, but recommend that investors exercise in the near-term.





Foo Zhi Wei UOB Kay Hian | http://research.uobkayhian.com/ 2018-04-26
SGX Stock Analyst Report BUY Maintain BUY 25.00 Down 30.600



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