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:
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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
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https://research.uobkayhian.com/
2018-08-30
SGX Stock
Analyst Report
18.200
Same
18.200
