Venture Corporation - Maybank Kim Eng 2019-07-19: Silver Linings Playbook


Venture Corporation - Silver Linings Playbook

2Q19 may miss; but maintain BUY

  • Looking past 2019E, multiple levers of growth appear intact and Venture Corporation (SGX:V03) is a beneficiary of the US-China trade war, as around 85% of production is outside China. However, 2Q19 may miss amid customers’ product transitions, and a potential share price fall may provide an even more attractive entry.
  • History suggests the stock is well supported at long-term mean dividend yield of 5.3%, which implies SGD13.20 on FY19E basis. We await 2Q19 results to reassess our forecasts.
  • Maintain BUY and ROE-g/COE-g Target Price of SGD19.74 (based on 2.2x FY19E P/B).

US-China trade war beneficiary

  • Only 2% of Venture Corporation’s revenue is affected by tariffs. Venture Corporation is strategically positioned in context of the trade war, as Malaysia, Singapore and US have historically accounted for around 85% of production. New customers won as a result of the trade war should contribute more meaningfully in the next 1-2 years as time is needed to launch new products.

Strong cash flows to support dividends

  • In an analysis dated 10 Jun (see report: Venture Corp - Maybank Kim Eng 2019-06-10: Long-Term Growth Intact), even in a scenario we think unlikely where FY19-21E earnings are slashed by 15-17%, we believe Venture Corporation’ FCF is strong enough to sustain at least SGD0.70 annual DPS.
  • Assuming that dividend yield expands to its long-term mean of 5.3% (since 2004), Venture Corporation's share price support may be found at SGD13.20.
  • Key risks are
    1. our underestimation of revenue volatility as a result of customers’ product transitions, and
    2. worse than expected end-market demand.

Customer and industry outlook

  • Key observations from consensus revenue revisions of Venture Corporation’s well-known customers year-to-date:
    • Most customers are Keysight and Fortive, and life science customers like Thermo Fisher and Agilent. Exceptions are networking customers and Illumina.
    • For networking customers (i.e. Broadcom and Lumentum), guidance cuts wave of tariffs.
    • Although Illumina slashed 2019 revenue growth guidance to 6% from 13-14%, guidance for Novaseq shipments to be “flat to slightly up” y-o-y has year.
    • Philip Morris says there are now 11.3m IQOS users globally (+24.8% y-o-y, +8.7% q-o-q), and observe favourable momentum across various geographies.
  • Read-across from Plexus’ (Venture Corporation’s closest peer) 3Q19 results:
    • Stable outlook for sectors that feature highly complex products and demanding regulatory environments. Plexus expects new program ramp ups and stable end markets to offset demand reduction in the communications sector. Within APAC, Plexus’ Malaysia plant has been a significant beneficiary of new manufacturing wins.
    • We believe this is consistent with the above observations of Venture Corporation’s customers. In addition, while Venture Corporation has noted increased caution among customers, it has not yet observed signs that new products slated for launch in 2H19 will be delayed.

Long-term growth drivers

Trade war beneficiary

  • The supply war has already begun. Venture Corporation expects customers won as a result of the US-China trade war to contribute more meaningfully in coming years. This trend is not exclusive to Venture Corporation.
  • The trade-war has wins, in part because of Plexus’ footprint in Malaysia.

Consistent customer wins

  • Venture Corporation has a 2016. Venture Corporation’s stopped disclosing actual number of customers from 2017 onwards, instead emphasizing it has more than 100 active relationships. That said, Venture Corporation remains actively in pursuit of new customers, and still sees contributions from new customers won in previous years to grow in 2019.

Customers still expecting growth in 2020-21

  • Broadly, consensus is still expecting Venture Corporation’s -8%, based on our ROE-g/COE-g methodology.
  • Furthermore, a few of Venture Corporation’s well known customers are market leaders in their fields, and expect to grow above market rate. These customers are also exposed to megatrends (even in China) such as genomics, food safety, and 5G such as Illumina, Thermo Fisher, Agilent and Keysight.

Lai Gene Lih CFA Maybank Kim Eng Research | 2019-07-19
SGX Stock Analyst Report BUY MAINTAIN BUY 19.740 SAME 19.740