Venture Corp - Maybank Kim Eng 2019-06-10: Long-Term Growth Intact


Venture Corp - Long-Term Growth Intact

Recent pullback creates entry point; Upgrade to BUY

  • We upgrade VENTURE CORPORATION LIMITED (SGX:V03) to BUY from HOLD on a price basis with unchanged earnings estimates and Target Price. The shares have fallen 18% since late-Apr amid a broad sector sell-off. See Venture Corp share price.
  • Given the earnings volatility, we favour Venture Corp due to its more secure longer-term prospects from:
    1. resumption of growth from a broad base of >100 customers; and
    2. its ability to sustain ~10% net margin from increased value-add with customers.
  • Our SGD19.74 Target Price is based on ROE-g/COE-g assuming 2.2x FY19E P/B (FY19-21E average ROE of 15% and LTG of 2%).

Scenario analysis

  • We assume a downside scenario of an 8%/17% cut in FY19E revenue/ core PATMI which leads to a ROE-g/COE-g fair value of SGD16.43(1.9x FY19E P/B).
  • Our scenario assumptions are:
    1. earnings volatility due to customers’ product transitions;
    2. delay in new product introductions (NPIs) in 2H19 across multiple customers;
    3. revenue decline from customers’ exposure to Huawei;
    4. demand weakness from a deterioration in global capex appetite; and
    5. pricing and cost pressures.
  • We find this unlikely due to:
    1. y-o-y growth from new customers won in past years;
    2. margin sustainability from strong value-add with customers and astute cost management; and
    3. Venture Corp has not observed signs NPIs will be delayed.
  • See sensitivity analysis of implied earnings expectation at various share prices in attached PDF report.

Long-term growth thesis unchanged

  • Once the earnings volatility passes, we expect a resumption of growth from:
    • wallet expansion with existing customers; and
    • contributions from new ones.
  • Venture Corp has had a good track record of delivering on both. Venture Corp notes the US-China trade war has been a catalyst for customer wins. These could contribute more meaningfully in the next 1-2 years.

Better clarity during 2Q19 results

  • Our DPS assumptions are unchanged in this scenario analysis as:
    1. Venture Corp has a track record of either maintaining or increasing dividends over the years; and
    2. we expect dividends to still be supported by strong FCF generation and balance sheet.

Lai Gene Lih CFA Maybank Kim Eng Research | 2019-06-10
SGX Stock Analyst Report BUY UPGRADE HOLD 19.740 SAME 19.740