Venture Corporation - UOB Kay Hian 2019-01-07: The Shipments Are Strong With This One; Upgrade To HOLD

VENTURE CORPORATION LIMITED (SGX:V03) | SGinvestors.io VENTURE CORPORATION LIMITED (SGX:V03)

Venture Corporation - The Shipments Are Strong With This One; Upgrade To HOLD

  • Shipment data suggests a strong 4Q18, as guided by management during their 3Q18 results. While unsurprising, given that 4Q has traditionally been Venture Corp’s strongest quarter, we suspect it had the added benefit from order front-loading as a result of the 90-day trade war ceasefire. Order front-loading may bode ill for 2019 production.
  • Negatives have been largely priced in and we upgrade to HOLD. Target price remains unchanged at S$12.90, pegged to 11x 2019F PE.
  • Entry price is: S$12.40.



WHAT’S NEW


4Q18 shipments are up strongly.

  • Our tracking of VENTURE CORPORATION LIMITED (SGX:V03)’s shipments overseas shows indications of a strong rebound in 4Q18 vs 3Q18.
  • On a segmental basis, shipments for the key test & measurement/medical/others (T&M/MED/OTH) segments showed a strong rebound from Sep 18 levels, while retail store solutions/industrial products (RSSIP) showed a trend of increased shipments.


STOCK IMPACT


Shipment data does suggest a V-shaped recovery.

  • During the 3Q18 briefing, management had remarked that they expected a V-shaped recovery in 4Q18 vs 3Q18, and that a bottom was seen for the point-of-sales (POS) segment. The data suggests this to be the case.
  • We further note that higher-than-average shipments were seen from key clients like NCR for 4Q18.

Uptick not a surprise; order front-loading may magnify impact.

  • The uptick in 4Q18 shipments is unsurprising, given that it has traditionally been a strong quarter. Additionally, the 90-day ceasefire between US and China may have a positive impact to Dec production, as Venture Corp’s clients front-load orders to ship to end-users before the 1 Mar 19 deadline. This may impact orders later in 2019, dampening production outlook.

Production upside limited, downside risk remains.

  • The upside for production appears to be limited even if the economic outlook remains buoyant. Venture Corp’s clients’ growth outlooks are plateauing and it is likely that production will at best be maintained at current levels.
  • Downside risk to production outweighs the potential for upside.

Over-production, again?

  • With regard to the I-Quit-Ordinary Smoking (IQOS) devices, there appears to be some degree of over-production for the IQOS 2.4+ model. Channel checks suggest combined production from both Flex and Venture Corp to be nearly double the implied device sales from Philip Morris’s (PMI) 9M18 results. Furthermore, ground checks show that discounts are being offered for the purchase of a second IQOS 2.4+ holder in Japan, possibly below manufacturing cost.
  • Coupled with the slew of earlier discounts for IQOS 2.4+ kits, these suggest an attempt to clear inventory. With a third manufacturer potentially coming in, it seems unlikely that IQOS 2.4+ orders can be comparable to that in 2018 in the base case. We are sceptical that IQOS 3 orders can fully replace a lower order outlook for IQOS 2.4+.


EARNINGS REVISION/RISK


No changes to our earnings forecast.

  • Our earnings forecast remains unchanged. The strong shipment data makes our implied 4Q18 earnings of S$102m (28% of full-year estimates) plausible, so we are keeping this forecast unchanged. 4Q results typically account for 27-29% of full-year earnings.
  • For 2019 estimates, we will re-visit it later in 1Q19 when clarity on production outlook emerges. Our street-low estimate of S$334m is largely due to a weaker IQOS production outlook for 2019.

Risk of higher dividend payout.

  • Given the share price under-performance, we will be unsurprised if management undertakes defensive moves such as issuing a special dividend. This will likely prompt a spike in share price.


VALUATION/RECOMMENDATION


Downside largely priced in – Upgrade to HOLD.

  • Since our downgrade in Nov 18, Venture Corp has declined by 15.7% and underperformed the STI by 13.8%. The decline comes on concerns of a manufacturing slowdown in 2019, exacerbated by the global selloff from fears of an economic slowdown.
  • Negatives have largely been priced in and we are upgrading our recommendation to HOLD.
  • Our target price of S$12.90 remains unchanged, pegged to a P/B-ROE derived 11x 2019F PE. Entry price: S$12.40

Trading at 9.7x ex-cash 2019F PE, 13% above -1SD.

  • At current valuations, Venture Corp is trading at 9.7x ex-cash 2019F PE, vs its long-term ex-cash mean PE of 13x.
  • Net cash per share as of 9M18 was S$2.42/share.





Foo Zhi Wei UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-01-07
SGX Stock Analyst Report HOLD UPGRADE SELL 12.900 SAME 12.900



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