Venture Corporation - CGS-CIMB Research 2018-07-11: Trade War Suggests Cautiousness

Venture Corporation - CGS-CIMB Research 2018-07-11: Trade War Suggests Cautiousness VENTURE CORPORATION LIMITED SGX:V03

Venture Corporation - Trade War Suggests Cautiousness

  • Venture reiterated that it was targeting growth in FY18 during our call with its investor relations (IR) manager last Friday.
  • At this juncture, Venture has not detected any changes in its customers’ guidance or forecasts.
  • To be cautious and to factor in potential revenue headwinds, we pare down our revenue growth forecasts to the 7.3% average rate achieved by Venture in FY14-16.
  • We also lower our target P/E multiple to 12.3x and reduce our FY18-20F EPS forecasts by 8.7-14.5%.
  • Downgrade to HOLD with a lower target price of S$17.83.



Call with investor relations

  • We spoke with Venture’s investor relations manager last Friday. 
  • Venture is still targeting for growth in FY18. The traditionally stronger 2H seasonality effect is currently expected to hold in 2018. There are also no changes to guidance/visibility from customers at the moment. 
  • Although there are still component shortages, Venture has been able to manage this given its established relationships with suppliers. This analyst report is shared at SGinvestors.io.


Trade war impact

  • At this juncture, Venture has not seen any changes as a result of the trade war. The company is in constant contact with its customers to manage the situation. 
  • We note that 81% of Venture’s production (by site area) is located in Malaysia. The group also bought a 39,012 square metre site in California recently. 
  • We note that, in the past, Venture successfully helped its customers to transition their production from other locations to its Malaysian facilities. This analyst report is shared at SGinvestors.io.


2Q18 expectations

  • Looking at Venture’s FY13-17 historical performance, on average, the second quarter accounted for 24.7% of sales and 22.7% of net profit. Even though FY17 was an exceptional year, the difference is not significant whether we use the average over FY13- 16 or FY13-17. 
  • Taking history as a guide, 2Q18 net profit could come in at S$87.6m (+25% y-o-y and 5% q-o-q). 2H18 net profit, however, could fall 15.7% y-o-y given the high profit base in 2H17.This analyst report is shared at SGinvestors.io.


Adopting a cautious stance

  • To be cautious, we assume that Venture’s sales over FY18-20F will revert to the average 7.3% growth achieved over FY14-16. 
  • We excluded the FY17 revenue growth rate of 39.3% as growth that year was exceptionally strong for Venture as well as the tech industry in general. Despite the threat from higher costs due to the tariff impact as well as the ongoing component shortage, we leave our margin assumptions intact as we assume that Venture will continue to manage costs well (as evident in 1Q18 results). This analyst report is shared at SGinvestors.io.


Valuation derating

  • Also, given the ongoing valuation derating and the possibility of average 8% earnings growth over our FY18-20F forecast period, we derate the stock’s P/E multiple to 12.3x, 0.5 s.d. below the 11-year average of 15.3x (the 11-year average was previously 15.4x). This analyst report is shared at SGinvestors.io.


Downgrade to HOLD

  • Our target price falls to S$17.83 given the earnings cuts and lower P/E. Downgrade to HOLD. 
  • A upside key risk to our call is the resolution of US/China trade tensions, which could see Venture revert to a higher revenue growth rate over our forecast period instead. 
  • Downside risks could come from product launch delays by customers. During the global financial crisis, Venture’s lowest P/E was 6.4x and the average P/E was 14.6x. This analyst report is shared at SGinvestors.io.



US & China At Loggerheads


Trade war commences…

  • The US imposed import tariffs on US$34bn of Chinese goods last Friday. On its part, China has promised to immediately impose retaliatory duties of a similar size on US goods. The US has also released a list of an additional US$16bn in products targeted for tariffs and President Trump has suggested the final total could eventually reach US$550bn. This analyst report is shared at SGinvestors.io.

… and accelerates

  • On Tuesday in the US, the Trump administration pushed ahead with plans to impose tariffs on an additional US$200bn, escalating the trade war with China. The tariffs could take effect after public consultations end on 30 Aug, according to a statement from the US Trade Representative’s office. 
  • Bloomberg reveals that the proposed list of goods includes consumer items, such as clothing, television components and refrigerators as well as other high-tech items, but it omitted some high-profile products, like mobile phones. This analyst report is shared at SGinvestors.io.

Impacts the tech supply chain

  • SEMI (the global industry association serving the manufacturing supply chain for the electronics industry) estimates that the initial round of tariffs will increase costs for its members by between US$20m and US$35m. 
  • The second list of US$16bn in goods, which is more heavily focused on technology products, could produce a hit of at least US$500m. This analyst report is shared at SGinvestors.io.

Economic growth could be affected

  • If the situation escalates into a full-blown trade war, costs will generally increase and demand will be affected. Companies will have to grapple with balancing the ability to pass on the cost increases to consumers and the willingness to stomach lower profit margins. The International Monetary Fund has also warned that an extended spat could undermine the strongest global expansion since 2011.
  • According to a 6 Jul AFP article, businesses (responding to a Federal Reserve survey) around the US told the central bank that spending plans had been scaled back or postponed and they also warned of further adverse effects from the trade conflict.This analyst report is shared at SGinvestors.io.


What We Think

  • China is a key production base for many electronics/automotive-related parts for the world. It is difficult to gauge the impact on earnings for tech manufacturing stocks under our coverage arising from the trade war. However, there could be downward pressure on earnings if the situation worsens.
  • We think that MNCs may ask suppliers to help offset the additional tariff-induced costs. We understand from channel checks that some suppliers have indeed received such requests from their customers. The bigger worry is cuts in spending by MNCs as they turn cautious given these uncertainties.
  • From a production point of view, tech manufacturing companies under our coverage that have factories outside of China could have some room to manoeuvre as they would be able to help customers transfer production away from China to reduce the impact of the tariffs, if needed. Also, those with the ability to provide value-added products to their customers and those who do not compete on the basis of the lowest cost may be able to weather this trade war better, in our view.


2Q18 Earnings Preview

  • Offsetting anxiety from the potential impact of the trade war is the stronger US$, which is generally positive for tech manufacturing companies. Non-operational exchange gains could have a positive impact on earnings this year. 
  • Looking at Venture’s FY13-17 historical performance, on average, the second quarter accounted for 24.7% of sales and 22.7% of net profit. Even though FY17 was an exceptional year, the difference is not significant whether we use the average over FY13-16 or FY13-17. Using this as a guide, 2Q18 net profit could grow 25% y-o-y and 5% q-o-q. The stronger US$ could also affect earnings positively.
  • We also note that given the high net profit base in 2H17, 2H18 net profit could fall 15.7% y-o-y but still grow 25.2% q-o-q, reflecting the traditional stronger second-half effect. If the trade war does lead to a pullback in orders or delays in product launches by its customers, 2H18 net profit may also be affected negatively. This analyst report is shared at SGinvestors.io.





William TNG CFA CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-11
SGX Stock Analyst Report HOLD Downgrade ADD 17.83 Down 25.640



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