Venture Corporation - Maybank Kim Eng 2018-06-06: Comfort In The Tea Leaves

Venture Corporation - Maybank Kim Eng 2018-06-06: Comfort In The Tea Leaves VENTURE CORPORATION LIMITED SGX:V03

Venture Corporation - Comfort In The Tea Leaves

Project & revenue prospects intact; maintain BUY

  • Venture Corporation (VMS)’ share price has shed 25% since its April high, due to
    1. cyclical concerns; and
    2. operational “opacity”.
    However, our dashboards suggest that its customers remain confident about their 2018 prospects, anchored by robust capex spending, especially in the US. This corroborates what VMS has been sharing, that forecasts from its customers are healthy. 
  • We believe VMS remains a beneficiary of economic upcycle and multifaceted secular growth drivers.
  • Maintain BUY and ROE-g/COE-g Target Price (3.4x P/BV, FY18-20E average ROE 19.4%, LTG 2%).
  • Earnings delivery and management clarity could be catalysts.

Company Dashboard: Customers Expect Firm 2018

Major customers mostly beat

  • Of Venture Corporation (VMS)’ 16 well-known customers, 10 beat earnings estimates in the latest results season. 12 have either raised or reaffirmed guidance for the current fiscal year. This broad-based strength is positive, as VMS’ top 20 customers account for around 80% of its revenue. It also augurs well for new customers’ and / or new product contributions.
  • Consensus revenue for most of its customers has been raised for FY18/19 too. VMS itself says that rolling 12-month sales forecasts from its customers are healthy. It expects sequential growth throughout FY18.

T&M, M&LF, P&I & IP backed by capex spending; RSS muted but stable

  • Demand from test & measurement (T&M), medical & life science (M&LF) and industrial product (IP) customers appears the strongest. Its customers’ recent results were underpinned by:
    • Cyclicality. Industrial customers such as Honeywell and ABB are riding a firm capex cycle. In printing & imaging, customer HP has raised its FY18 guidance three times, suggesting cyclical strength amid longer-term secular decline.
    • Secular growth for T&M / M&LF. T&M customer, Keysight, has raised its organic long-term revenue-growth expectations by 1ppt to 4-5%, supported by developments in 5G, IOT, automotive electrification and automation. M&LF customers like Agilent, Thermo Fisher and Illumina are apparently benefiting from corporate, government and academia spending to address food-safety and population-ageing concerns, plus prospects for high-throughput genome sequencing.
    • Retail Store Solutions’ (RSS), though muted, is stable. Customers like VeriFone and NCR have not changed their guidance, suggesting a stable outlook. This cluster of customers is experiencing high-base effects due to policy-induced demand in India and Europe in 2017.
    (All global peers’ and global customers’ stocks mentioned in this report are Not Rated by MKE).

Sector Dashboard: Production & Exports Continue To Grow

US economy still expanding

  • The US economy continues to anchor the prospects of VMS’ customers. For now, its capex cycle is intact, as suggested by a downtrend in the US durable goods inventory to shipment ratio. Its economy continues to expand, with May 2018’s ISM reading touching 58.7, up from 57.3 in April. 
  • ISM New Orders less Inventories, which typically lead the ISM headline by a few months, have also ticked up.

Global chip sales & Malaysia / Singapore electronics exports continue to grow

  • Elsewhere, global chip sales and Asian electronics exports from Malaysia, Singapore, South Korea and Taiwan continue to grow. The former expanded 20% y-o-y while the latter expanded 11.5% y-o-y in March.
  • We believe electronics orders for Singapore-based firms such as VMS are intact, going by Apr 2018’s electronics production growth of 11.3%. This is complemented by solid electronics exports out of Malaysia, up 27% y-o-y in 1Q18. 
  • A significant portion of VMS’ products are made in Malaysia.

USD strength favourable, though inflation could be a risk

  • The USD has averaged only SGD1.32 YTD, vs 1.38 last year. That said, it has recovered by 2.1% to 1.34 since its April low. Continued improvements should be favourable for VMS’ ASPs.
  • VMS transacts in USD but reports in SGD. If the USD SGD is able to average 1.38 in 2018, we reckon VMS stands to recover lost ground from USD-induced y-o-y ASP weakness in 1Q18.

Two other risks are rising wage and logistics costs.

  • Around 65% of VMS’ 12,000 workforce is based in Malaysia. Part of the new Malaysian government’s election promise is to raise minimum wages. While VMS’ workers in Malaysia are generally paid above the minimum wage, we expect knock-on effects on VMS, for it to remain a competitive employer.
  • Meanwhile, rising crude prices could raise its logistics costs. Brent crude has averaged USD70/bbl YTD vs USD55/bbl in 2017.

Valuation & Risks

  • Given its customers’ robust outlook on the back of a strong US economy, we keep our forecasts and Target Price unchanged. 
  • Our SGD28.83 Target Price remains based on ROE-g/COE-g (3.4x P/BV, FY18-20E average ROE 19.4%, COE 7.1%, LTG 2%). Our Target Price implies 19.6x FY18E P/E, close to the average for its global high-mix, low-volume peers like Benchmark Electronics and Plexus Corp.
  • As we approach its seasonally stronger 3Q and 4Q, we believe earnings deliveries and potential improved clarity from management could be catalysts.
  • Risks to our call include:
    1. a substantial deterioration in business conditions;
    2. unfavourable FX swings and
    3. potential cost increases.

Lai Gene Lih Maybank Kim Eng | https://www.maybank-ke.com.sg/ 2018-06-06
SGX Stock Analyst Report BUY Maintain BUY 28.830 Same 28.830