Venture Corporation - OCBC Investment 2019-08-13: Cautiously Optimistic


Venture Corporation - Cautiously Optimistic

  • Well telegraphed weak 2Q19.
  • Decent 2H19 prospects.
  • Lower Fair Value of S$18.42.

A well-expected soft 2Q19

  • Venture Corporation (SGX:V03)’s 2Q19 results came in slightly under our expectations. Revenue fell 5.1% y-o-y to S$903.5m, which we believe to be in part the result of well-anticipated customer product transitions.
  • Gross margin fell 3.2 ppts y-o-y to 24.9%, though a 74% y-o-y drop in R&D expenses helped to narrow the drop in net margin to 0.2%ppts y-o-y; Venture Corporation’s 10.1% net margin remains at the higher end of its 6-10% target. PATMI came in at S$90.8m, or 23.1% of our full-year forecast.
  • Venture Corporation has maintained its interim DPS of 20 cents – recall that 1H18 was the group’s first-ever interim DPS payout. See Venture Corporation's dividend history.

Reasons to remain constructive

  • Venture Corporation remains positive on opportunities within the life sciences/oncology space, given that these areas should exhibit more secular growth. We understand that most of its seven technology domains are growing (except advance payment solutions), with many customers’ solutions at the early stage of their growth curves.
  • We continue to believe that the ongoing trade tensions are positive for the group, given its facilities in Malaysia and Singapore, though contribution is not expected to be significant in the near-term.
  • Venture Corporation noted that it has in place several initiatives which are supportive to revenue, which we believe could be in the form of new product introductions in 3Q19, followed by ramp-ups in 4Q19. Still, Venture Corporation has articulated the lack of end-market visibility for 4Q19, which we believe is largely due to current uncertainties stemming from trade tensions.
  • Given its net cash position, we believe that there is latitude for Venture Corporation to adopt share price supportive actions such as increasing its DPS beyond the 70 cents declared in FY18, though the latter remains our base case for now.

Fair Value of S$18.42

  • To account for a more subdued trade environment and 1H19 results, we cut our PATMI assumptions by 5.9% and 5.1% for FY19 and FY20, respectively.
  • We also lower our P/E peg from 15x to 14x (in-line with 5-year average), and our Fair Value consequently drops from S$20.89 to S$18.42.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-08-13
SGX Stock Analyst Report BUY MAINTAIN BUY 18.42 DOWN 20.890