Venture Corporation - UOB Kay Hian 2018-08-30: Excluding T&M / Medical Clients, Earnings Results Show Slowing Growth

Venture Corporation - UOB Kay Hian Research 2018-08-30: Excluding T&m/med Clients, Earnings Results Show Slowing Growth VENTURE CORPORATION LIMITED SGX:V03

Venture Corporation (VMS) - Excluding Test & Measurement/ Medical Clients, Earnings Results Show Slowing Growth

  • Venture Corporation (VMS)’s key clients shows only the Test & Measurement/Medical/Others segment showing strong signs of growth. Other segments are showing signs of slowing. Even Illumina is showing slower Instrument sales growth.
  • We expect VMS to bank on R&D to help bottom-line in the near term. The next generation IQOS production outlook for 2019 remains unclear but could lift our earnings estimates.
  • Maintain HOLD and target price of S$18.20. Entry: S$16.00.



WHAT’S NEW

  • We summarise the key findings from Venture Corporation (VMS)’s clients post their latest quarterly results:

~ SGinvestors.io ~ Where SG investors share

Test and Measurement/Med (T&M/Med): 5G drives Keysight demand.

  • Venture Corporation’s (VMS) key clients in the T&M/Med segment continue to exhibit strong revenue growth. Driving the strong growth are clients Keysight and Fortive (Fluke), which both saw continued double-digit revenue growth since 2017.
  • Management guidance was positive for both, with full-year guidance raised. Agilent and Waters continue to exhibit steady single-digit growth comparable to their historical trends.

Illumina: Instrument growth revenue has slowed.

  • Despite the 24% y-o-y revenue growth for Illumina, this was largely driven by consumables sales. Instrument sales fell 7% y-o-y. 
  • NovaSeq guidance remains unchanged for 2018.

Retail store solutions/Industrial products: Revenue growth slowing.

  • Key clients in this segment are reporting slowing single-digit growth. For example, ABB saw revenue growing 5% y-o-y in its latest results. Outlook remains positive although growth appears to be limited in the low 1-3% for most of its addressable markets.
  • On the other hand, NCR saw hardware revenue drop 16% y-o-y in its latest results in a clear sign that hardware sales momentum has stalled.

Networking/Communications: Growth largely driven by Broadcomm.

  • Broadcomm saw revenue grow 20% y-o-y in 2Q18, led by Enterprise storage (+63% y-o-y). Wireless communications and wired infrastructure also continued to grow although it was only the latter that posted a 22% q-o-q increase.
  • Oclaro saw revenue fall 19% y-o-y for 4QFY18.

Philip Morris: Small IQOS 3 production in 2018.

  • Our channel checks suggest that production for the next-generation IQOS to be small for 2018. Production is expected to be less than a tenth of 2017’s volume, with first delivery targeted for end-18. Outlook for 2019 remains unclear. 
  • The next-generation IQOS design features a metal plate that introduces a new listed supplier to the IQOS supply chain.


STOCK IMPACT


Slowing growth offset by T&M/Med.

  • The broad read across the financial results of Venture Corporation (VMS)’s clients is slowing growth, with some slipping into negative growth. Stronger growth from clients in the T&M/Med segment helps offset this slowdown although it remains difficult to believe they can drive 2H18 earnings to outperform on a y-o-y basis.
  • Weaker figures for both Singapore exports and VMS’ overseas shipments guide our view on this.

R&D expected to offset production weakness.

  • Venture Corporation (VMS) has considerable R&D projects to draw upon that can help boost bottom line. Given the cost-plus model, VMS has some degree of control that may help offset weakness on the production front. 
  • We expect R&D expenses to remain elevated in the coming quarters.


EARNINGS REVISION/ RISK


No change to 2018-20 earnings estimates for now.

  • We are not changing our estimates at this juncture. Our estimates have not taken into account the new IQOS 3 production schedule.
  • For 2018, factoring it in will result in a 1-3% increase in earnings.
  • For 2019-20, our estimates for IQOS production may be on the low side and we will revise when visibility emerges. For the rest of the segments, our growth assumptions are unchanged.


VALUATION/ RECOMMENDATION

  • Maintain HOLD and target price of S$18.20, pegged to 14x 2018F PE.
  • Upside risk could stem from a higher-than-expected production schedule for IQOS 3 in 2019, which will significant lift earnings. Until that clarity emerges, maintain HOLD. 
  • Entry price is S$16.00.





Foo Zhi Wei UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-08-30
SGX Stock Analyst Report HOLD Maintain HOLD 18.200 Same 18.200



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