Venture Corporation - DBS Research 2019-02-25: Delivers On Promise Of Earnings Recovery

VENTURE CORPORATION LIMITED (SGX:V03)

Venture Corporation - Delivers On Promise Of Earnings Recovery

Venture Corp's solid 4Q18 profit exceeds consensus expectations, sets the tone for a stronger FY19F.
Record R&D and inventory levels are possible leading indicators; acquisition of manufacturing site in Malaysia signals optimism over near-term growth prospects.
Surprised dividend bump from 60 to 70 Scts per share.
Maintain BUY; Target Price raised to S$21.70 after rolling forward our earnings base.

VENTURE CORPORATION LIMITED (SGX:V03) 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.
After being penalised by the market over the lack of clarity in its underlying business profile, we believe the
1. solid 33% q-o-q profit jump in 4Q18,
2. dividend surprise, and
3. expectations of sequential growth in the upcoming quarters
should help reinstate investor confidence.
Initiatives to future-proof its business are also underway, as Venture Corp embarks on new pathways to make a quantum leap but these will take time.
Meanwhile, record R&D expenses and inventory levels – possible leading indicators for the group - coupled with strong earnings outlook by key customers provides confidence in Venture Corp’s ability to at least sustain its robust growth momentum over the medium term. Maintain BUY!

Our street-high estimates reflect our positive view on Venture Corp’s ability to monetise its 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.

Our valuation base is rolled forward to FY19F (from FY18F/19F).
Against an unchanged valuation multiple of 15.8x PE (based on global peers’ average), we derive a higher Target Price of S$21.70.

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

After a challenging 3Q18, Venture Corp is delivering on its promise of a V-shaped recovery. 4Q18 profits jumped c.33% q-o-q to S$107.7m, while in line with our street-high estimates, beat consensus expectations (~$100m) by > 7%.
Efficiency improvements aside, maiden contributions from new customers and new product introductions were key factors.
Against the 13% decline in FY18 revenue to S$3.5 bn, Venture Corp delivered record profits of S$370.1m on a core earnings basis (FY17 earnings were boosted by a one-off S$11.3m divestment gain from Fischer Tech) reflects its successes in the area of value creation and operational efficiency. This is further corroborated by strong sequential improvements on the margin front.
In 2018, gross and net margins improved from 26.6% and 9.8% in 1Q18 to 27.0% and 11.9%, respectively,

Venture Corp's FY18 DPS was raised to 70 Scts, +17% vs 60 Scts in FY17. This marks the second consecutive year of dividend increase for Venture Corp. Prior to FY17, the group paid a stable DPS of 50 Scts.
Higher DPS of 70 Scts represents c.54% payout, a sustainable level for the long-term.
At current price, this translates to a yield of c.4.3%, which is decent.

The positive momentum is set to continue this year, led by broad-based growth across the group’s seven technological domains.
Rising R&D expenditures and inventory levels – possible leading indicators - which reached record levels in FY18 also paints a positive picture.
Benefits from the ramp-up on new products which were introduced progressively from 4Q18 will also continue to accrue positively to Venture Corp in FY19F.
Several key customers have also guided for high single-digit to double digit growth in the year ahead, which augurs well for the group New business opportunities arising on the back of US-China trade diversions could also provide further upside

Management also revealed that initiatives were underway to take Venture Corp to its next stage of growth, which will be a multi-year effort. To broaden Venture Corp’s value capture and potential for future quality growth, new pathways outside of existing markets have been identified.
The new facility in Milpitas, California is poised to play a central role in forging new partnerships / deepening collaborations with technological leaders and as a key R&D hub
Meanwhile, recent moves to acquire an adjacent manufacturing site in Tebrau, Johor (Malaysia) suggests optimism over near-term growth prospects.

Carmen TAY DBS Group Research | https://www.dbsvickers.com/ 2019-02-25

SGX Stock Analyst Report BUY MAINTAIN BUY 21.7 UP 21.300