Venture Corporation - CGS-CIMB Research 2019-10-18: Taking A Breather At S$15.98


Venture Corporation - Taking A Breather At S$15.98

  • Given global GDP growth concerns and slower revenue growth for Venture’s customers, we now think 2H19 may be weaker than 1H19.
  • We keep our ADD call but cut FY19F core EPS by 2.8% to reflect the above view. We will reassess our FY20-21F forecasts post 3Q19 results (8 Nov).
  • Technically, we suggest locking in profits with better re-entry levels at S$14.70-15.00.

Caution warranted in a trade war

  • According to Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), by 2020, tariffs already imposed or announced would shrink global GDP by 0.8%. Even though Donald Trump has said that the US and China have reached a substantial phase one deal, no details have been announced or agreements formally signed. IMF also said that the trade war will cut 2019 global growth to its slowest pace since the 2008-2009 financial crisis.
  • IMF is projecting 2019 global GDP growth at 3.0%, down from 3.2% in a July forecast due to the increasing fallout from the global trade friction.

Customer outlook also slowing

  • Looking at the consensus revenue growth expectations for Venture Corp (SGX:V03)’s customers, we note that the average revenue growth expectation for FY19 has been lowered to 4.3% versus 5.7% previously.
  • Similarly, for FY20, the average revenue growth expectation has been lowered to 4.7% versus 5.2% previously.

FY19 may see 2H weakness

  • Given the global growth concerns induced cautiousness and lowered revenue growth outlook for Venture Corp’s customers, we think our previous assumption of equal halves for FY19 may not hold. Instead, we now think Venture Corp could see a weaker 2H19 versus 1H19.
  • Hence, we have reduced our revenue growth assumption for FY19 to 3.0% versus 4.0% previously. Gross material margin is also cut slightly, leading to a 2.8% decline in FY19 net profit.

Updates from Philip Morris (PM) 3Q results

  • IQOS has been launched in Atlanta and PM is positive on the potential of IQOS in the US market. With regards to IQOS MESH, PM already has an improved device and is on track to be able to launch in the market this year. Full product launch/ramp-up is likely to be in 2020.

Maintain ADD

  • Venture Corp is expected to report its results on 8 Nov. We keep our Target Price of S$16.28, still based on 12.5x P/E (0.5 s.d. below the 12-year forward average P/E of 15.4x).
  • Potential re-rating catalysts are new product launches by its customers.
  • Slower orders from customers are a key downside risk. We will reassess our FY21-22F forecasts post 3Q results announcement.

Technical view – SELL

  • Venture’s share price has been consolidating between the S$16.00 range high and S$14.70 range low since July and the long-term trend remains bearish. With the share price once again trading near the S$16.00 range high, we expect a reversal lower to take place. Moreover, there is also the 200-day moving average and 61.8% Fibonacci retracement level that is capping the upside.
  • The reversal lower would likely take the price back down to the S$15.00 – 14.70 support area. We see support level at S$14.70/14.01 while resistance levels are S$16.00/16.70.

William TNG CFA CGS-CIMB Research | 2019-10-18
SGX Stock Analyst Report ADD MAINTAIN ADD 16.280 SAME 16.280