Venture (VMS SP) - Maybank Kim Eng 2018-04-26: Growth Prospects Remain Favourable

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VENTURE CORPORATION LIMITED V03.SI

Venture (VMS SP) - Growth Prospects Remain Favourable

1Q18 PATMI (+72% y-o-y) below our est.; Target Price cut 8%

• We continue to believe that Venture Corporation (VMS) has multifaceted growth drivers and see the recent VMS share price correction as an even more attractive opportunity to BUY. 
• VMS delivered very respectable 1Q18 PATMI of SGD83.7m (+72% y-o-y), but was below our estimate of SGD90m, mainly due to the weaker USD vs the SGD. 
• VMS typically delivers 20% of net profit in the seasonally weaker 1Q but in this case it was 18%. Revenue rose 1.5% y-o-y, but would have been up 9% on a constant currency basis. 
• We have revised our revenue growth estimates and cut FY18-20E EPS by 7-9% to reflect the results. Our Target Price is reduced 8% to SGD28.83, now based on 3.4x P/B from 3.7x previously.

Broad-based growth; outlook still healthy

• Management reiterated that growth remains broad-based across its 100 active customers. While VMS is cognisant of a more cautious environment given recent trade tensions, it views the environment as still healthy for growth. 
• VMS believes that growth has not peaked, and continues to look forward to more collaborative opportunities with its wide-base of customers. The sustained pick-up in R&D could portend interesting FY19/20E prospects.

Strong customer engagement and cost control

• Despite FX headwinds, VMS managed to deliver a third consecutive quarter of > 9% net margin (1Q18: 9.8%, +4ppt y-o-y). This was achieved due to a favourable product mix and strong cost control. 
• The mix reflects an improved share of higher value-added products and R&D revenue across multiple projects. Both reflect strong customer engagement efforts, past and present.

Share price correction overdone

• The shares have fallen 24% from the recent peak. We think the current depressed share price offers an attractive buying opportunity. 
• Our Target Price is now based on 3.4x FY18E P/B (FY18-20E avg. ROE: 19.4%, COE: 7.1%) from 3.7x, previously.

Revisions to estimates 

• We cut FY18-20E EPS by 7-9% after taking into account lower revenue growth compared to our estimates. We have left our gross margin assumptions unchanged and made minor tweaks to SGA as a % of sales to factor in Venture’s astute cost management. 
• R&D has been increasing since 4Q16 and remains strong. This could portend interesting FY19/20E prospects, in our view.

Three takeaways from Venture Corp (VMS)'s 1Q18 results

• 1Q18 PATMI of SGD83.7m (+72% y-o-y, -36% q-o-q) made up 18% of our and the street’s FY18E full year forecasts. This is below the historical trend of 1Q net profit accounting for 20% of full year earnings. 
• Revenue grew 1.5% y-o-y to SGD856m on the back of the weaker USD relative to the SGD. On a constant currency basis, VMS would have seen sales increase by 9.1% y-o-y.
• Takeaways from this set of results:
  

  Growth still broad based:

  • Management continued to attribute growth to a broad base of customers. In 4Q17, VMS has highlighted that 75% of its revenue was attributed to customers with decent growth prospects, and hinted that this mix is still relevant in 1Q18. 
  • VMS remains optimistic in its prospects to be involved in more projects and partnerships with its diverse range of customers. VMS reiterated that it has 5,000 products across its base of 150 customers, of which 100 are active relationships.
  
  

  Outlook still healthy:

  • VMS believes that the economic outlook is still healthy, and there has been little to no disruption to business as a result of recent trade-related tensions. In fact, three clusters of manufacturing excellence in the US, China and Singapore allow it flexibility in being able to transfer production across geographies if tensions indeed materialise. 
  • At the end of 1Q18, inventory stood at an all-time high of SGD725m, which we believe is less a concern about a demand slowdown and likely a favourable indicator of growth in coming quarters, based on management comments.
  
  

  Strong customer engagement paying off:

  • Net margin of 9.8% (+4ppt y-o-y) could have been higher if not for the weaker USD vs. the SGD. This is the third consecutive quarter of > 24% gross and > 9% net margins. Management attributed this to a favourable shift in product mix. A portion of this was driven by the increased share of products with higher value-add on the back of multi-year efforts to strengthen customer engagement. 
  • R&D also contributed to the higher value added product mix and improvement in profitability. R&D expenses nearly doubled in 1Q18 to SGD15.1m, or 1.8% of revenue. This was attributable to many ongoing R&D initiatives hitting milestones.

Swing Factors 

Upside 

• Better-than-expected reception for high-growth products. 
• Stronger US / global economy. 
• Moderate USD strength as the revenue of VMS is entirely in USD. 

Downside 

• M&A among customers, and acquisitions of customers by competitors could disrupt orders. 
• Excessive USD strength may erode customer competitiveness. Excessive USD weakness may weaken its SGD earnings. 
• Customer demand for VMS to hold more inventories at its major hubs. This will tie up working capital. 

Lai Gene Lih Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-04-26

SGX Stock Analyst Report BUY Maintain BUY 28.83 Down 31.200