VENTURE CORPORATION LIMITED (SGX:V03)
Venture Corporation - In Business For The Long Term
- Venture Corp's 3Q18/9M18 earnings disappointed at 21%/68% of our and consensus’s full-year expectations due to product transition issues faced by customers.
- Venture Corp expects a q-o-q recovery in 4Q18 as customers’ products are launched and new customers contribute to revenue.
- We upgrade Venture from Hold to ADD as we roll over to FY20F. Our S$17.44 Target Price is based on 12.3x (0.5 s.d. below the 11- year average of 15.3x) multiple.
3Q18 earnings disappointed
- 3Q18 earnings disappointed as revenue fell 27.4% y-o-y which was attributed to the impact of customers’ planned transition to new replacement products and some customers’ M&A activities.
- With strong cost management (staff costs fell 12.5% y-o-y) and tax planning (effective tax rate of 14.7% in 3Q18 versus 15.2% in 3Q17), net profit margin for 3Q18 was 10.5% (3Q17: 10.5%).
Management positive on 4Q18 and FY19
- Venture Corp anticipates that new product introductions from several customers will lead to a q-o-q revenue improvement in 4Q18. The group also expects to capture revenue contributions from several new customers in 4Q18, with improving traction in subsequent reporting periods.
- Venture Corp expects business momentum to pick up again after the M&A integration processes affecting its customers are completed.
Opportunities arising from the trade war
- The bulk of Venture Corp’s manufacturing capacity is in Johor Bahru and Penang in Malaysia. In addition, Venture has a c.30.6-acre plot of land in the Batu Kawan Industrial Park in Penang, Malaysia, where the company can build additional facilities if needed.
- Venture Corp is seeing inquiries from new/existing customers regarding its ability to support them in manufacturing locations outside of China.
Risk – global slowdown
- We believe a possible global growth slowdown that could reduce demand or hold back new product launches is a major risk. Venture is working on several products that could lay the foundations for future growth.
- In this note, we also compare Venture to its peers, highlight industry opportunities and recent developments at its major customers.
Upgrade to ADD from Hold
- On rollover, we upgrade Venture to an ADD from Hold with a lower Target Price of S$17.44 (based 12.3x (0.5 s.d. below the 11-year average of 15.3x) FY20F earnings.
- Catalysts are the launch of new products by customers, as well as the possibility of the acceleration of existing or new customers seeking to have more production outside of China.
- Downside risks could come from delays in product launches by customers.
William TNG CFA
CGS-CIMB Research
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https://research.itradecimb.com/
2018-11-05
SGX Stock
Analyst Report
17.44
DOWN
17.830
