Venture Corporation - UOB Kay Hian 2019-05-03: Sensitivity Analysis On Contribution From iQOS

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

Venture Corporation - Sensitivity Analysis On Contribution From iQOS

  • On 30 April, the US FDA cleared iQOS and the product will start selling in the US in Jun 19. As one of the device manufacturers, VENTURE CORPORATION LIMITED (SGX:V03) could benefit but any contribution should start only in 2020 due to inventory backlog and competition.
  • We assume Venture Corp would manufacture 12m IQOS devices in 2020. Every 1m additional devices could increase net profit by S$7.3m, or 1.8% of 2020 net profit.
  • Maintain HOLD. Target price: S$19.01. Entry price: S$17.00.



WHAT’S NEW


US FDA cleared PMI to sell iQOS.

  • After the US Food and Drug Administration’s (FDA) clearance on 30 April, Philip Morris International (PMI) plans to start selling the heated tobacco device, iQOS, in the US in Jun 19. With an exclusive licence, Altria will start selling iQOS in Atlanta and plans to open an iQOS store and numerous mobile stores. Heatsticks, a Marlboro-branded tobacco stick that is used with the iQOS device, will be available in about 500 retail stores.

US is a huge market but we are mindful of potential competition.

  • Philip Morris International commented that the FDA approval is an important step for some 40m Americans who smoke and iQOS offers a smoke-free alternative for them to continue smoking.
  • Despite the huge addressable market, we note that Juul, a vaporised e-cigarette, has already started selling in the US since 2015 and commanded more than 70% market share as of 2018.

Venture could benefit from sales of more IQOS devices.

  • As one of the iQOS device manufacturers, Venture Corp could benefit from more demand for the device. However, we think the impact on Venture Corp’s 2019 earnings could be muted as iQOS sales could initially be drawn from old inventories and the device could have been built by Venture Corp earlier.
  • Our base-case scenario for 2020 assumes Venture Corp would manufacture 12m iQOS devices. Every additional 1m devices could increase Venture Corp’s 2020F net profit by S$7.3m, or 1.8% of 2020F net profit. To recap, we estimate Venture Corp sold around 12m iQOS devices in 2018.


STOCK IMPACT


Expect near-term volatility but mitigated by longer-term positive outlook.

  • We expect some near-term volatility to stock price as we expect 2Q19 performance to be weaker y-o-y before seeing improvement in 2H19 on new product launches.

Most key customers except PMI reported slower revenue growth in 1Q19.

  • We note that revenue growth of most of Venture Corp’s key customers, such as Broadcom (+8.7% y-o-y), Thermo Fisher (+4.6% y-o-y) and Illumina (+1.7% y-o-y), continued to increase but at a slower pace compared to 2018 when most reported double-digit revenue growth.
  • On the other hand, Philip Morris (+3.2% y-o-y ex-currency) continued to report healthy revenue growth and expects full-year ex-currency growth of more than 5%.


EARNINGS REVISION/RISK

  • We maintain our earnings forecasts.


VALUATION/RECOMMENDATION

  • Maintain HOLD and target price of S$19.01, based on the long-term PE mean of 14.1x (up from 12.7x).
  • Entry price is S$17.00.


SHARE PRICE CATALYST

  • Better-than-expected net profit.
  • Higher-than-expected dividend.
  • Potential EPS-accretive acquisitions.





John Cheong UOB Kay Hian Research | Joohijit Kaur UOB Kay Hian | https://research.uobkayhian.com/ 2019-05-02
SGX Stock Analyst Report HOLD MAINTAIN HOLD 19.010 SAME 19.010



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