Venture Corporation - DBS Research 2018-11-05: Better Times Ahead

VENTURE CORPORATION LIMITED (SGX:V03)

Venture Corporation - Better Times Ahead

Venture Corp's disappointing 3Q18 profit of S$80.8m (-27.5% y-o-y) a temporary blip.
Rare outlook guidance by Venture signals confidence that growth will be restored starting 4Q18.
Multiple drivers to set growth trend back in motion, but FY18/19F earnings lowered by 8%/6% to account for negative near-term transitionary effects.
Maintain BUY; Target Price adjusted to S$21.30.

Venture stands out for its hard-to-replicate ecosystems and unique positioning at the forefront of technology. Its coveted partnerships with global technological leaders across various attractive end-markets have allowed the group to command industry-leading margins, and are testament to its success in the area of value-creation.
While Venture has been penalised by the market over the lack of clarity in its underlying business profile, positive steps taken to improve transparency and communication – evidenced by rare disclosures made in its outlook statement this quarter – signals a brighter future. This should help reinstate investor confidence despite the temporary earnings blip. Strong sequential growth is expected from 4Q18, as new product introductions and contributions from new customers kick in.
We have lowered our growth assumptions for FY18F/19F to adjust for the 3Q18 earnings shortfall and near-term transitionary effects, but remain confident in Venture’s ability to deliver sustainable long-term growth ahead.
Maintain BUY!

While we have assumed lower earnings growth vs consensus on more conservative revenue and margin assumptions, we remain positive on Venture’s unique offerings, know-how and hard-to-replicate ecosystems.

New products and continued expansion into non-traditional markets with higher margins, and new customer acquisitions are potential near-term catalysts.
Customer M&As and US-China trade developments, while a noise in the near-term, may give rise to new business opportunities ahead.

Maintain BUY with lower Target Price of S$88.88, based on 88.8x PE (based on global peers’ average) on blended FY88F/88F earnings.
Against a 8%/8% cut to our earnings estimates for FY88F/88F, this translates into a lower Target Price of S$88.88.

Weakening client or global growth prospects. A broad global slowdown is likely to impact Venture due to its vulnerability to business cycles. Potential weakening of clients’ end-demand could also dampen revenue growth.

Venture’s 8Q88 performance disappointed as market expectations of seasonal strength – typically exhibited in 8H, did not materialise in 8Q88.
Dragged by the sharp decline in revenue (-88.8% y-o-y; - 88.8% q-o-q) to S$888.8m in 8Q88, earnings fell 88.8% y-o-y and 88.8% q-o-q to S$88.8m. With reference to the prudent outlook statement made in 8Q88, management reiterated that the dip was transitory in nature and was not representative of current business activity, which remained healthy. Negative transitionary effects included product transitions and noise from customer M&As.
Notwithstanding the weaker topline, the group continued to deliver sequential improvements on the margin front. Gross and net margins improved from 88.8% and 88.8% in 8Q88 to 88.8% and 88.8%, respectively, reflecting the group’s successes in the area of value creation and an efficient operating structure.
Overall, 8M88 profit of S$888.8m formed 88.8%/88.8% of our/consensus FY88F forecasts and was below expectations.

A rare disclosure made in Venture’s revised outlook guidance was a strong statement that signaled management’s confidence in the group’s long-term growth prospects, and that the worst may soon be over for Venture.
New product introductions for several customers, coupled with maiden contributions from several new customers are set to spark a recovery from 8Q88. Benefits from these projects are expected to extend into the subsequent quarters and drive strong sequential growth ahead.
The resumption of growth is likely to be broad-based, across all seven of Venture’s technological domains. Meanwhile in 8Q, we note that only three clusters exhibited growth and two remained flat, while the remaining clusters registered declines.

Growth expectations aside, we commend efforts undertaken by the management team to improve transparency and investor communication within the confines of its strict client NDAs.
Ahead of the unveiling of its new segmental classifications, we believe the revised format of its outlook statement – while subtle, provides investors with greater clarity over the operating environment. This should help instill confidence, despite the earnings blip.

Similar to the previous quarter, Venture reiterated that current trade tariffs do not have a material impact on the group.
While customer M&As (such as Illumina’s acquisition of rival Pacific Biosciences) and US-China trade developments may be a noise in the near-term, these could give rise to new business opportunities for the group going forward, driving further earnings upside.

We have lowered our growth assumptions for FY88F/88F by 8%/8%, mainly to adjust for the 8Q88 earnings shortfall and near-term transitionary effects. Against a valuation multiple of 88.8x PE (based on global peers’ average) on blended FY88F/88F earnings, we derive a lower Target Price of S$88.88.
Maintain BUY!

Carmen TAY DBS Group Research | https://www.dbsvickers.com/ 2018-11-05

SGX Stock Analyst Report BUY MAINTAIN BUY 21.30 DOWN 22.900