Venture Corporation - RHB Invest 2018-11-05: 3Q Blip Represents BUYing Opportunity


Venture Corporation - 3Q Blip Represents BUYing Opportunity

  • Maintain BUY, new SGD19.00 Target Price from SGD22.20, 17% upside.
  • Venture reported a weak 3Q18, mainly contributed by the transitory effect of its customers having new product introductions or undergoing M&A, and a slowdown in its POS businesses. However, management remains bullish on a V-shaped recovery for 4Q18 and subsequent quarters due to positive q-o-q growth already seen in all its divisions.
  • While we maintain our call, we cut FY18F-19F EPS by 10% and 7%, and peg our Target Price to 14x (from 15.5x) FY19F P/E.

3Q revenue decline due to three main factors

  • Venture’s 3Q revenue plunged 27% q-o-q, mainly due to the impact arising from customers’ planned transitions to new replacement products and some customers’ M&A activities for the reported quarter, as well as a slowdown in its point-of-sales (POS) segment.

V-shape recovery ahead

  • The same factors causing a slowdown in 3Q18 will likely contribute positively to a V-shaped recovery in 4Q18, as these new production introductions will likely occur in 4Q.
  • Venture also secured a few new customers, which will likely contribute to revenue growth in 4Q18. The customers undergoing M&A transitions should also see business activity pick up after the integration processes are completed – which will be positive for the company in subsequent quarters.
  • All in all, management has also seen business pick up strongly across all segments. We expect it to recover strongly in 4Q18, and this may likely continue for subsequent quarters in 2019

Higher margins expected in 4Q18.

  • Despite the sharp drop in revenue of 27% in 3Q18, Venture managed to keep NPM at 10.5%, which is impressive.
  • With management bullish on a V-shaped recovery in 4Q and subsequent quarters, we expect the company to benefit from operating leverage, as it will also enjoy wider NPM ahead.

3Q blip represents BUYing opportunity.

  • Due to the dismal 3Q18 performance, we cut FY18F-19F EPS by 10% and 7%. However, we remain confident that a V-shaped recovery for Venture is highly possible in the subsequent quarters – especially if the trade war between the US and China is resolved.
  • In addition, we expect Venture to pay DPS of SGD0.70 this year, ie slightly higher than FY17, representing an attractive FY18F yield of 4.3%.
  • We think that the negative results may trigger short-term selling pressure – but this is likely to present investors with opportunities to accumulate the stock. Premised on this, we maintain BUY with a lower SGD19.00 Target Price pegged to its historical low P/E mean of 14x, vs 15.5x FY19F P/E previously.
  • Key risks to our call are an economic slowdown, delay in new product launches and the continuation of the US-China trade war.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | 2018-11-05
SGX Stock Analyst Report BUY MAINTAIN BUY 19.00 DOWN 22.200