Venture Corporation - CGS-CIMB Research 2019-04-26: Near-Term Growth Is Priced In


Venture Corporation - Near-Term Growth Is Priced In

  • Venture Corp's 1Q19 revenue grew by 8.5% y-o-y and formed 25% of our full-year forecast, in line with the six-year historical average of 23%.
  • Venture Corp's 1Q19 core net profit at 24% of our full-year forecast was in line with the six-year historical average of 20%.
  • Near-term volatility likely due to customers’ product transitions but overall, we expect y-o-y growth as new customers/products contribute in 2H19.
  • Net profit margin for 1Q19 was 9.8%, similar to 1Q18 but still better than 1Q17 (5.8%). Effective tax rate was lower at 14.5% versus 15.1% in 1Q18.
  • Downgrade to HOLD from Add as current growth expectations are priced in.

Venture Corp's Revenue growth resumes

  • VENTURE CORPORATION LIMITED (SGX:V03)'s 1Q19 sales grew 8.5% y-o-y in S$ terms. In US$ terms, we estimate that revenue grew by 5.7% y-o-y.
  • Net profit margin at 9.8% declined from 11.9% in 4Q18 but was flat vs. 1Q18. A lower effective tax rate and the tapering off of R&D expenses also helped boost earnings.
  • Balance sheet remained net cash and free cashflow generation remained strong.

Near-term headwinds

  • Venture Corp sees near-term volatility arising from some customers’ product transitions. The protracted trade tensions and the global economy slowdown are further concerns that could lead to delays in customers’ product launches.
  • We note, for example, that Waters Corp (WAT US) has downgraded its FY19 revenue guidance due to challenges in the China market. See revenue growth outlook of Venture Corp's known customers in attached PDF report.

Overall, FY19 should still see growth

  • We think Venture Corp can still deliver y-o-y earnings growth in FY19 as new customers start contributing and customers launch new products in 2H19. Waters, for example, will launch two new products in 2H19.
  • Venture Corp also mentioned that it won a new customer involved in the testing of complex semiconductor chips, and it has been able to provide modular solutions (which require engineering capabilities) to this customer.

Where is Venture Corp headed?

  • See how Venture Corp compete differently and its new oppportunities in attached PDF report. 

Downgrade to HOLD as short-term outlook is priced in

  • We downgrade to HOLD to reflect the short-term outlook being priced in. We believe that at this juncture, 2H seasonality may be weaker than in FY18.
  • In the next few years, we believe Venture Corp’s capability build-up in the Life Science/Analytical Instruments space bears watching as genome sequencing/mass spectrometry and chromatography find wider applications.
  • Target Price is maintained at S$17.88, still based on 12.5x P/E (0.5 s.d. below the 12-year forward average P/E of 15.4x).
  • Potential catalysts are new product launches by customers.
  • Downside risk: slower orders from customers.

William TNG CFA CGS-CIMB Research | 2019-04-26
SGX Stock Analyst Report ADD MAINTAIN ADD 17.880 SAME 17.880