Venture Corporation - Maybank Kim Eng 2019-10-29: Tempering Expectations; Long Term Growth Drivers Intact


Venture Corporation - Tempering Expectations; Long Term Growth Drivers Intact

Signs of incremental headwinds; Long term drivers intact

  • Texas Instruments (TXN US) is observing broad-based weakness across end-markets, including those VENTURE CORPORATION (SGX:V03) participates in, due to the trade war. We see this as a short term headwind on Venture Corp’s volumes and lower our FY19-21E EPS by 2-8%. ROE-g/COE-g Target Price is largely unchanged at SGD18.85, now based on 2.1x FY20E P/B from FY19E previously.
  • As
    1. Long term growth drivers are intact;
    2. this headwind appears priced in; and
    3. 5% dividend yields are well supported by FCF,
    we remain BUYers on dips.

Headwinds may affect short-term volumes…

  • While Venture Corp has not confirmed Texas Instruments as its supplier, we believe Texas Instruments is a reliable read-across to Venture Corp’s prospects as
    1. Texas Instruments is among the largest and most diversified chipmakers globally; and
    2. nearly half of Texas Instruments’s revenue is exposed to industrial and communications markets, including test & measurement, medical, and wired networking, sectors that Venture Corp participates in.
  • Texas Instruments blames increased cautiousness on the trade war for its disappointing 4Q19 guidance, and sees weakness persisting, as businesses “pull back” on production momentum. As such, we are concerned that near term volumes may be weaker than expected.

…but long-term drivers are intact

  • We remain constructive towards Venture Corp’s long-term prospects, as over a longer horizon, it is a beneficiary of production rerouting as a result of the trade war. Venture Corp is also continually deepening relationships and focusing on value creation with customers, including those that enjoy exposure from exciting end-markets such as genomics, food safety and 5G infrastructure.

Recent observations of incremental headwinds

  • In the short term, we see evidence of rising cautiousness and this could offset tailwinds from new product ramp-ups. In Oct, the Chief Executive magazine reported that due to heightened uncertainties, only 46% of CEOs surveyed are expecting to increase capex in the following year. Such levels were last seen during the economic slowdown in 1H16.
  • To factor in such incremental headwinds, we cut FY19-21E EPS by 2-8%. Our ROE-g/COE-g Target Price is now based on 2.1x FY20E P/B (prev: 2.1x FY19E P/B), in turn based on FY20-22E average ROE of 14.4% and LTG of 2%.
  • In our view, a de-escalation of trade tensions which in turn translates to stronger capex sentiment may provide upside to our estimates. This is because Venture Corp’s long-term growth drivers remain intact.
  • Incremental headwinds are corroborated by the broad-based weakness observed by Texas Instruments. Key takeaways from Texas Instruments’s 3Q19 earnings:
    • Sentiment has deteriorated due to trade tensions. This has likely caused businesses at the front of the supply chain to “pull back” (likely referring to business/ production momentum), in turn affecting Texas Instruments. Texas Instruments said customers are “far more cautious” both y-o-y and sequentially.
    • 3Q19 was the 4th consecutive quarter of y-o-y revenue declines, and Texas Instruments expects weakness to persist. This is a departure from historical norm, where Texas Instruments faced 4-5 quarters of y-o-y declines before returning to positive growth.
    • Revenue: Industrial fell high/low single digits y-o-y/ q-o-q respectively. Communications equipment revenue fell 35% y-o-y/ 20% q-o-q. Weakness was broad based across customers, sectors, regions and technologies.
  • Meanwhile, the CEO’s Confidence Index has registered y-o-y declines since early 2019. We observed that y-o-y changes in Venture Corp's Share Price have close correlation to y-o-y changes in the CEO Confidence Index. This may be because:
    1. while Venture Corp’s revenues are diversified, its customers are largely US based; and
    2. reduced appetite for corporate spending affects Venture Corp’s volumes.
  • There have been exceptions to this trend, notably in 2007 and 2016-17, when strong earnings growth from Venture Corp was able to help Venture Corp's Share Price “outperform” the challenging economic sentiment.
  • As Venture Corp’s earnings growth in 2017 was driven by broad-based strength across customers, aided by strong macro sentiment, we believe a reversal of this optimism is a headwind to near-term volumes.

Headwinds likely priced in; Accumulate on dips

  • Given the risk of negative revisions to consensus’ forecasts, we see near-term headwinds to Venture Corp's Share Price. (see Venture Corp Target Price; Venture Corp Analyst Reports)
  • Nevertheless, we remain constructive towards Venture Corp over the longer term, as
    1. we expect more meaningful contributions from its customers production rerouting into Venture Corp’s facilities in coming years;
    2. near-term headwinds appear priced in; and
    3. DPS forecasts are backed by strong FCF.
  • Our analysis suggests that even if its FY19-22E earnings CAGR swings to -8%, implying a fair value of SGD14.00 on FY20E basis, strong FCF generation should still be able to fund DPS above SGD0.80 pa vs. our forecasts of SGD0.70-0.75. See Venture Corp Dividend History. This translates to potential yields of above 5.3%.
  • A key risk is weaker than expected capex sentiment which could delay Venture Corp’s earnings recovery.

Lai Gene Lih CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-10-29
SGX Stock Analyst Report BUY MAINTAIN BUY 18.85 DOWN 18.880