Venture Corporation - DBS Research 2019-08-13: Resilient 1H19 Despite Volatility


Venture Corporation - Resilient 1H19 Despite Volatility

Retain BUY call and Target Price of S$18.60.

  • Despite the prolonged trade US-China war and weak global outlook, VENTURE CORPORATION LIMITED (SGX:V03)’s 1H19 results were commendable (flattish vs 1H18). 2Q19 results were not as weak as expected.
  • Venture Corp stands out for its strength in various technology domains and partnership with key industry leaders. Its above-average net margin is a key differentiating factor from its peers. The company’s strong net cash should support expectations of a repeat of the higher 70-Sct dividend per share (DPS) in FY19F, which works out to a yield of 4.7%.
  • Venture Corp is one of the few blue chips that still offer attractive yields in this yield-hungry environment.

Where we differ:

  • We remain positive on Venture Corp’s ability to monetise its unique offerings, know-how and hard-to-replicate ecosystems. It continues to build new differentiating capabilities to enhance its competitiveness.

Potential Catalysts:

  • New products and continued expansion into non-traditional markets with higher margins, and new customers. Customer mergers and acquisitions (M&As) and US-China trade developments, while noisy in the near-term, may give rise to new business opportunities ahead.

WHAT’S NEW - Commendable 1H19 despite prolonged trade war and weaker global outlook

2Q19 results broadly in line; net margins comparable to 1Q19 and 2Q18.

  • Venture Corp’s 2Q19 revenue of S$903.5m was down 5.1% y-o-y and 2.7% q-o-q, mainly due to product transitions. Some of its customers are in the midst of launching new products or making enhancements to existing products. However, as a result of the trade war, outlook is cloudy and visibility shortened. Some customers prefer to stay on the sidelines before launching their new products, while older products are already being phased out.
  • Net profit margin of 10.1% in 2Q19 was comparable to 9.8% in 1Q19 and 10.3% in 2Q18. Overall, its net earnings of S$90.8m declined 7.3% y-o-y but were flat q-o-q. Both 2Q19 revenue and earnings account for 25% of our forecasts.
  • In 1H19, Venture Corp’s revenue of S$1832.2m and net earnings of S$181.7m were flat y-o-y and account for 51% / 50% of our forecasts. We were expecting a weaker 2Q19 but stronger 2H. The Group’s performance was underpinned by impactful value creation for its partners and relentless focus on operational excellence to drive productivity gains.
  • An interim DPS of S$0.20 was declared, no change from last year. See Venture Corp's dividend history.

Lower R&D expenses.

  • 2Q19 Research and Development (R&D) expenses were down 74% y-o-y to S$8.96m, due to lower customers’ requirements for prototyping, tooling, non-recurring engineering (NRE), materials and its related services. R&D manpower costs are separately recorded under employee benefits expense.

Strong cash position.

  • Venture Corp's net cash position remained strong at S$760.2m after final dividend payment of S$144.0m in May 2019. Y-o-y, net cash increased by S$113.3m (+17.5%) on strong operating cash flow.

Building new differentiating capabilities to enhance competitiveness.

  • Venture Corp will continue to diversify its value creation/value capture pathways in the multiple ecosystems it participates in. Focus will be on selected domains that have growth and value creation opportunities.

Gaining traction with existing and new customers.

  • Thus far, Venture Corp has been able to navigate through the challenging environment due to the trade war. In 2Q19, most of its technology domains did well. Venture Corp has been gaining traction with existing customers and new ones. Some new products initiatives are expected to be launched this year, which should help to narrow the gap during the product transition period.
  • Going forward, Venture Corp will continue to work with its customers to expand its value creation capabilities in domains like Test & Measurement, Medical & Devices and Life Science. Some of the segments in this cluster, for example genome sequencing, is still at the nascent stage of growth and opportunities are aplenty.

No change in earnings forecast, Target Price and BUY call.

  • Traditionally Venture Corp’s 2H has been stronger than its 1H. However, the volatile environment is set to persist, especially with renewed tension on the trade war front.
  • We prefer to be more cautious and maintain our forecasts even though 1H19 earnings already account for 50% of our full year estimates. Our Target Price of S$18.60 is pegged to its 10-year average PE of 13.7x on FY20F earnings.
  • Maintain BUY.

Lee Keng LING DBS Group Research | 2019-08-13
SGX Stock Analyst Report BUY MAINTAIN BUY 18.600 SAME 18.600