Venture Corporation - CGS-CIMB Research 2019-02-23: Patience Will Be Rewarded


Venture Corporation - Patience Will Be Rewarded

  • Venture Corp’s 4Q18/FY18 revenue at 25%/97% of our FY18 forecast was in line.
  • Venture Corp’s 4Q18/FY18 core net profit in line at 30%/102% of our FY18 forecast due to judicious cost management and q-o-q revenue improvement.
  • Key risk is impact on economic growth from the US-China trade war.
  • Maintain ADD with a higher S$17.88 Target Price, based on 12.56x FY20F core EPS.

V-shaped recovery wins back investor confidence

  • VENTURE CORPORATION LIMITED (SGX:V03)'s FY18 core net profit was in line at 102% of our forecast.
  • Although 4Q18 revenue fell 16.6% y-o-y, Venture Corp demonstrated its strong execution capability and reduced operating costs. This brought pre-tax margin to 13.7% in 4Q18 and net profit margin to 11.9%.
  • Offsetting the 16.6% y-o-y revenue decline in 4Q18 were notable declines in employee and R&D costs. Effective tax rate was also lower at 13.5% in 4Q18 vs. 14.9% in 4Q17.

Dividend stepped up

  • Venture Corp proposed to pay a final DPS of S$0.50. With interim DPS of S$0.20 declared in its 2Q18 results, full-year DPS has stepped up to S$0.70 from S$0.60 in FY17.
  • Venture Corp’s FY18 DPS of S$0.70 is fully funded by its strong free cashflow generation capability. We think Venture Corp’s new base DPS over FY19-21F will be S$0.70.
  • Although Venture may be able to raise DPS above S$0.70, we think the priority will be to grow the company.

Positive on the long term…

  • In 2019, Venture Corp aims to drive revenue growth through the group’s broad-based portfolio of technology domains, and continued success in new product launches for its partners. As some customers launched their products only in mid-4Q18, we expect the positive impact from these product launches to continue in FY19.
  • The next growth phase calls for Venture Corp to develop several dynamic ecosystems with its embedded Clusters of Excellence, to serve new markets in selected technology domains in the years ahead.

…backed by capacity planning

  • What has Venture Corp’s done to back up its words?
    1. We expect the fitting out of its facility in Milpitas, California, USA (strategically located in the Silicon Valley) to be completed in 2Q19 (purchase completed in Feb 18);
    2. purchase of a plot of land in Batu Kawan, Penang completed in Jul 16 and
    3. the recent announcement of the purchase of another factory in Tebrau, Johor, Malaysia.

Maintain ADD, higher Target Price with a lower tax rate

  • We raise FY19-20F EPS due to a lower 15% tax rate assumption. This leads to a higher S$17.88 Target Price, still based on 12.56x P/E (0.5 s.d. below the 12-year forward average P/E of 15.55x).
  • Potential catalysts are new product launches by customers.
  • Downside risk: slower orders from customers.

William TNG CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-02-23
SGX Stock Analyst Report ADD MAINTAIN ADD 17.88 UP 17.440