Venture Corporation - RHB Invest 2018-08-06: IQOS Rumours Set Straight

Venture Corporation - RHB Securities Research 2018-08-06: Iqos Rumours Set Straight VENTURE CORPORATION LIMITED SGX:V03

Venture Corporation - IQOS Rumours Set Straight

  • Maintain BUY with a new SGD22.20 Target Price from SGD26.00, 31% upside – pegged to 15.5x (from 17.2x) FY18F P/E.
  • We attended an analyst briefing with management and came away bullish.
  • Venture Corporation reported strong 2Q18, which debunked IQOS rumours, with PATMI up 40.2% y-o-y despite -6% y-o-y in revenue. This was due to higher margins from a change in business model to have more designing content in products produced, own proprietary product yielding 16-20% net margins and cost optimising throughout the company.

IQOS rumours debunked

  • There were constant fears that I Quit Ordinary Smoking (IQOS), which formed a large part of Venture Corp’s revenue, and the drop in orders or weak Purchasing Managers' Index (PMI) results would affect it severely. However, with 2Q results showing PATMI surged 40.2% y-o-y despite a 6% drop in revenue, it has clearly debunked existing IQOS rumours.

~ ~ Where SG investors share

Higher margins expected – transforming from EMS player.

  • Venture Corp incurred higher research & development (R&D) expenses, as many new projects won came with design content. Still, these expenses can be recouped in several ways. Based on the milestone with customers, it can bill customers and related costs will be booked into P&L.
  • Management has revealed that higher R&D expenses will lead to higher margins and it is constantly looking to increase depth and value of design content with customer products, which involve product and technology development.
  • Venture Corp has also developed its own propriety product, which is distributed and sold globally and yields a net profit margin of 16-20%, explaining the significantly higher overall net margins, compared to electronics manufacturing services (EMS) peers.

Trade war – implications and benefits.

  • Management has declared that < 2% of topline is implicated by the Harmonised System (HS) code in which it has worked out various strategies to mitigate these issues. Any duties will also be paid by its partners in the US. Its partners have also came out with 4-6 different ways to avoid extra tariffs. Management cited an example of a customer selling several products to Europe and the US, where it has its own factories in Europe shipping products to US. As a result, Venture can ship products to Europe while that customer’s own production can be sent to the US.
  • However, management is fearful of an escalation of the trade war, which might lead to more drastic scenario which will cause the whole economy to be affected and eventually influence Venture.

Interim dividend of SGD0.20 declared.

  • On the strong financial performance and cash position, management declared an interim dividend of SGD0.20. Venture Corp stated that it has paid a total of SGD2.1bn in dividends since it first started the exercise, excluding the recent declared dividend.
  • All in all, we expect Venture Corp to pay out a total of SGD0.70/share this year, slightly higher than last year, representing FY18F yield of 4.2%.
  • Maintain BUY with new SGD22.20 Target Price, pegged to 15.5x FY18F P/E due to weaker industry outlook.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | 2018-08-06
SGX Stock Analyst Report BUY Maintain BUY 22.20 Down 26.000