Venture Corporation - Maybank Kim Eng 2019-01-07: Still Resilient

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VENTURE CORPORATION LIMITED (SGX:V03)

Venture Corporation - Still Resilient

Most resilient to US-China trade war

• Maintain BUY albeit with a lower ROE-g/COE-g Target Price of SGD17.48, as
  1. we proactively lower FY18-20E EPS by 2-9% for macroeconomic uncertainties; and
  2. increase COE from 7.1% to 8% to factor in increased volatility.
• We continue to believe its Southeast-Asian production footprint, rising R&D, and customer & end-market diversity could cushion effects of the US-China trade war and/or a potential downturn in US capex spending.
• Stronger than expected pace of recovery and/or dividends could be catalysts.

Growing headwinds

• Many of VENTURE CORPORATION LIMITED (SGX:V03)’s customers are US-based. Recent softening of manufacturing indicators both globally and in the US may heighten end-market caution in the coming quarters. This may temper the pace of Venture Corp’ sequential earnings recovery.
• That said, Venture Corp still believes its recovery will be underpinned by a production ramp-up of a broad base of new products in its TMO and N&C segments.

Fundamentals still strong

• Although sentiment on the stock may be negative in the near term due to macro uncertainties, we believe:
  1. Venture Corp is a potential beneficiary of the US-China trade war, given its sizeable production out of Singapore and Malaysia,
  2. exponential rise in R&D since 3Q16, which is expected to underpin future revenue growth, and
  3. strength in end-markets for test & measurement, medical and life-sciences, from policy-related spending.
• This could cushion a potential downturn in US corporate spending.

Dividend yields intact

• Our Target Price is now based on 2x FY19E P/BV, from 2.5x previously. It implies 14.4x FY19E P/E, just slightly below its 14-year mean of 15.3x.
• Strong cash generation should continue to support dividend yields, in our view.

Earnings Revisions

• We cut FY18-20E EPS by 2-9%, as Venture Corp’s sequential earnings recovery in 4Q18-2019 could be potentially tempered by lower capex appetite in the US due to end-market caution. Aside, manufacturing activity in Malaysia and Singapore, which account for a combined 80% of Venture Corp’s production, is contracting. The Nikkei Malaysia Manufacturing Dec 2018 PMI hit 46.8, its lowest in 6.5 years while Singapore’s electronics PMI was 49.8 in Dec 2018.
• Amid macro uncertainties, we see resilience from:
  • New products. Venture Corp’s sequential recovery should be underpinned by a gradual ramp-up of a broad base of new products in its TMO and N&C segments. Their value-add should be higher than previous generations, given increased R&D involvement in recent years.
  • Customer growth. Consensus still expects sales of Venture Corp’s well-known customers to increase by 4-5% in 2019-20. While consensus revenue-growth expectations for these customers have been tempered over the past six months, their cuts have not been material.
  • Diversified end-markets. In the TMO segment (57% of FY17 revenue), there remain pockets of end-market strength. Agilent, Thermo Fisher, Keysight and Illumina delivered strong results in latest quarterly earnings in part due to spending by governments / academia and on 5G infrastructure. Strong growth from China has been a consistent theme.
  • Potential benefits of US-China trade war. China makes up only 15% of Venture Corp’s production. We think Venture Corp could benefit from customers routing their production away from China.

Valuation

• Our ROE-g/COE-g Target Price is now based on 2x FY19E P/BV, from 2.5x previously. This is largely because we have increased our beta from 0.7x to 0.85x to capture increased volatility of the stock following heightened macro uncertainties.
• Our new Target Price implies 14.4x FY19E P/E, just slightly below its 14-year average of 15.3x.
• We do not think current valuations of 1SD below its 14-year P/E mean are warranted, as valuations of this level in the past reflected
  1. pricing pressure (1Q06),
  2. severe demand weakness (1H08-1H09, 4Q11) or
  3. a marked decline in the USD vs SGD (9M11).
• Presently, we do not see such threats materialising.
• We also continue to expect 2019-20E FCF of above SGD1/share, which should comfortably support DPS.

Lai Gene Lih CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-01-07

SGX Stock Analyst Report BUY MAINTAIN BUY 17.48 DOWN 22.230