VENTURE CORPORATION LIMITED (SGX:V03)
Venture Corporation - Top Pick For Tech Sector
- Maintain BUY with SGD19.00 Target Price, pegged to 14x FY19F P/E, plus 4.8% FY19F yield.
- Venture’s dismal 3Q18 was mainly due to the transitory effects of its customers introducing new products, customers undergoing M&A, and a slowdown in its POS business segments. However, management remains bullish on a V-shaped recovery for 4Q18 and the subsequent quarters. This is due to positive growth signs already seen in all its business segments, which would be accompanied by higher margins due to operating leverage when revenue picks up.
3Q revenue drop due to three main factors.
- Venture suffered a 27% drop in its revenue, mainly due to the impact arising from customers’ planned transition to new replacement products and some customers’ M&A for the reported quarter, as well as a slowdown in its point of sale (POS) business.
A V-shaped recovery ahead.
- The same factors causing a slowdown in 3Q18 are likely to contribute positively to a V-shaped recovery in 4Q18, as these new product introductions will likely occur in 4Q. In addition, Venture has also managed to secure a few new customers, which will likely contribute to revenue performance in 4Q18.
- The customers undergoing M&A transitions should have their business activity pick up after the M&A integration processes are completed, which will be positive for Venture in the subsequent quarters.
- All in all, management has also seen business activity improve strongly in all its business segments, and so we expect to see a strong recovery in 4Q18 (which is likely to continue on in 2019).
Higher margins expected in 4Q18.
- Despite a sharp 27% drop in 3Q18 revenue, Venture managed to sustain its net margins at 10.2%, which is impressive.
- With management bullish on a recovery in 4Q and the subsequent quarters, we expect Venture to enjoy operating leverage as well as higher net margins ahead.
Trade war – implications and benefits.
- Management has declared that < 2% of its topline is implicated by the Harmonised System (HS) code in which it has worked out various strategies to mitigate these issues. Any duties will also be paid by its partners in the US. Its partners have also came out with 4-6 different ways to avoid extra tariffs.
3Q blip represents a buying opportunity.
- We remain confident that a V- shaped recovery for Venture is highly possible in subsequent quarters, especially if the trade war issues between US and China are resolved. We also expect Venture to pay out a total dividend of SGD0.70/share this year, slightly higher than last year, representing an attractive FY18F yield of 4.8%.
- In addition, as discussed above, Venture is less exposed to trade war issues vs its peers. As a result, we maintain BUY with SGD19.00 Target Price, pegged to 14x FY19F P/E.
- Venture is our Top pick for the Singapore technology sector.
- Key risks would be economic slowdown, delay in new product launches, a worsening trade war.
Jarick Seet
RHB Securities Research
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Lee Cai Ling
RHB Invest
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https://www.rhbinvest.com.sg/
2018-12-14
SGX Stock
Analyst Report
19.000
SAME
19.000
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