Venture Corporation - CGS-CIMB Research 2019-11-08: Opportunity Knocks For Long-term Investors


Venture Corporation - Opportunity Knocks For Long-term Investors

  • Venture Corp's 3Q19 core net profit of S$85.2m was 5.4% above our S$80.8m forecast. 9M19 core net profit formed 76% of our full-year estimate.
  • There are still headwinds and uncertainties over the next twelve months, but opportunities in supply chain shifts and new product launches are also intact.
  • Downgrade to HOLD from Add. Target Price rises to S$16.88 as we roll over to FY21.

Venture Corp's 3Q19 results largely in line

  • VENTURE CORPORATION (SGX:V03)'s 3Q19 sales rose 12.8% y-o-y while reported net profit (RNP) grew 5.5% y-o-y. 9M19 RNP was 76% of our/consensus estimates, higher than the historical trend over the past six years. 3Q19 RNP was 5.4% above our core net profit forecast of S$80.8m. See Venture Corp Announcements; Venture Corp Latest News.
  • If we adjust for S$3.2m in foreign exchange gain and a S$1.2m write-back of over provision of tax, Venture Corp’s RNP would be in line with our expectations.

3Q19 results takeaways

  • Margin pressure – this can be seen in the gross material margins as well as the pre-tax level. Margins have been affected by competition and pricing pressure and could have been worst if not for Venture Corp’s culture of driving productivity and operational efficiencies.
  • Balance sheet remains strong with free cashflow of S$96.5m generated for the quarter. Shareholders may raise the possibility of a higher dividend given the cash balance of S$804m and strong free cashflow generation.

We expect earnings weakness in 4Q19

  • We maintain our view that 2H will be weaker than 1H. Our 4Q19 core net profit estimate of S$85.5m implies q-o-q growth of 0.4% and y-o-y decline of 21%. We believe consensus earnings for FY19 will need to be reduced to reflect 2H weakness.

FY20 could still be a challenge

  • Venture Corp sees uncertainties in the business and geopolitical environment unabating over the next twelve months. There are still opportunities given
    1. hastened efforts by companies to relocate supply chains for tariff mitigation and
    2. new and key product launches by several partners over the next twelve months.
  • The longer-term outlook is less concerning as Venture Corp remains focused on its strategy of value creation, which justifies its higher-than-peers’ margins.
  • We remain cautious in our FY20-21F earnings forecasts which assume low single-digit growth as Venture Corp’s customers launch new products. We cut FY20-21F earnings slightly to reflect these challenges.

Downgrade to HOLD

  • Our Target Price rises to S$16.88 (still based on 12.5x P/E which is 0.5 s.d. below the 12-year forward average P/E of 15.4x) as we roll over to FY21. See Venture Corp Share Price; Venture Corp Target Price.
  • Potential rerating catalysts are successful new product launches by its customers, while slower orders from customers is a key downside risk.

William TNG CFA CGS-CIMB Research | 2019-11-08
SGX Stock Analyst Report HOLD DOWNGRADE ADD 16.880 UP 16.280