Venture Corporation - UOB Kay Hian 2019-06-26: Uncertainties Could Cap Upside; Maintain HOLD

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VENTURE CORPORATION LIMITED (SGX:V03)

Venture Corporation - Uncertainties Could Cap Upside; Maintain HOLD

• Since the escalation of the trade war in May 19 which led to a Huawei ban, Broadcomm has reduced its full-year revenue guidance by 8% or US$2b.
• The 1-month share price rally of 9.1%, along with the weaker 2Q19 growth expectation for Venture Corp (SGX:V03) due to some customers’ product transitions could cap share price upside. See Venture Corp's share price.
• We trim our 2019-20F EPS by 5.1-8.1% and our target price is reduced by 5.8% to S$17.91 (14x 2019F PE), to factor in the macro uncertainties.
• Maintain HOLD. Target: S$17.91. Entry price: S$15.00.

WHAT’S NEW

Huawei ban has led Broadcomm to reduce its full-year guidance.

• Since the escalation of the US-China trade war on 3 May 19, which led to Huawei ban from the US shortly after, Broadcom has officially reduced its full-year revenue guidance based on two factors:
  1. Huawei accounted for US$0.9b of the revenue contribution, and
  2. a broad-based slowdown in the demand environment, driven by continued geopolitical uncertainties, which has driven customers to actively reduce inventory levels.

Key customers of Venture Cop have recorded slower revenue growth in recent quarters.

• Most of Venture Corp (SGX:V03)’s key customers have recorded slower revenue growth, especially in the recent two quarters. Revenue growth of most of Venture Corp’s key customers, such as Broadcom (+10.0% y-o-y), Thermo Fisher (+4.6% y-o-y) and Illumina (-5.9% y-o-y), showed a slower pace of growth compared with 2018 when most reported double-digit revenue growths.

Product transitions could impact 2Q19 profitability.

• To recap, Venture Corp has highlighted that some customers’ products are going into the end-of-life stage and this transition could introduce some near-term volatility to its financial performance.
• On the other hand, this weakness could be mitigated by new product launches in 2H19. Against the backdrop of this uncertain macro environment, we think that there is a higher risk that the new launches might be delayed.

Share price upside could be capped after the recent rally and uncertain macro environment.

• Aside from the macro uncertainties highlighted above, we note that the recent strong 1-month share price rally of 9.1% could limit upside for Venture Corp. See Venture Corp's share price.

STOCK IMPACT

Expect near-term volatility.

• We expect stock price to see some near-term volatility as we expect 2Q19 performance to be weaker y-o-y before improving in 2H19 on new product launches. However, given the uncertain macro outlook, we think that there is a higher risk of new launches being delayed.

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

• We note that revenue growth of most of Venture Corp’s key such as Broadcom (+10.0% y-o-y), Thermo Fisher (+4.6% y-o-y) and Illumina (-5.9% y-o-y), are showing growth as compared with double-digit revenue growth.
• On the hand, Philip Morris (+3.2% y-o-y ex-currency) continues to report growth and growth of more.

EARNINGS REVISION/RISK

• We cut casts for 2019 (-5.1%), 2020 (-6.8%) and 2021 (-8.1%) to factor in a more uncertain mac.

VALUATION/RECOMMENDATION

Maintain HOLD.

• Maintain HOLD with a 58% lower target price of S$17.91, based on the long-term PE mean of 140x. Entry price is S$15.00.

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/ 2019-06-26

SGX Stock Analyst Report HOLD MAINTAIN HOLD 17.91 DOWN 19.010