Venture Corp - OCBC Investment 2018-11-05: A Series Of Unfortunate Events

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VENTURE CORPORATION LIMITED (SGX:V03)

Venture Corp - A Series Of Unfortunate Events

• A quarter to forget.
• Some positives, but needs time to develop.
• Lower Fair Value of S$20.13.

Soft set of 3Q18 results

• Venture Corporation Ltd’s (Venture) 3Q18 results came in below our expectations.
• Revenue fell 27.4% y-o-y to S$770.4m, which management attributed to
  1. customers’ planned transition to new replacement products,
  2. some customers’ M&A activities, as well as
  3. some point-of-sale businesses recording declines,
  though the latter has likely reached a trough, in management’s view.
• Core PATMI fell 28.5% y-o-y to S$80.1m, which formed 18.9% of our full-year forecast.
• On a 9M18 basis, core PATMI was up 12.1% y-o-y at S$259.0m, constituting 71.4% of our full-year forecast.
• Notwithstanding the softer set of results, PBT margins continued to climb from 11.5% in 1Q18 to 12.3% in 3Q18. We believe that this was a combination of a change in product/revenue mix for the quarter, as well as tighter cost controls.
• Overall, we deem this set of results to be under ours and the street’s expectations.
• While management was also of the view that 3Q18 numbers were soft, they believe that the revenue drop is but a blip, and was due to an unfortunate confluence of negative transitory events surfacing in 3Q18. To that end, we note that top-line q-o-q recovery is to be expected in 4Q18.

Trade war impact

• Management noted that they are in talks to shift production from their current customers’ plants in China to Venture’s facilities in Malaysia and Singapore, while new customers from the US, who would traditionally source products from China, are now also participating in this supply migration process. However, it is likely that this tailwind would only show up from 1Q19 onwards.
• Also, management shared that despite the macro rumblings, feedback on customer sales has been encouraging till date, with purchase orders backing up this optimism.

Earnings revision

• According to Bloomberg consensus, Venture’s US-listed peers have a forward target P/E range of 8.2x – 16.0x. We maintain our 15x target P/E for Venture, given its stronger-than-average net profit margins and healthy balance sheet.
• However, we have assumed more conservative earnings estimates for FY18 and FY19, thus dropping our Fair Value estimate from S$23.23 to S$20.13.

Joseph Ng OCBC Investment Research | https://www.iocbc.com/ 2018-11-05

SGX Stock Analyst Report BUY MAINTAIN BUY 20.13 DOWN 23.230