Venture Corporation - DBS Research 2019-11-11: Near Term Hiccups

VENTURE CORPORATION LIMITED (SGX:V03)

Venture Corporation - Near Term Hiccups

Venture Corp's 3Q19 results slightly below on weaker margins.
Weaker 4Q19 expected; 2H19 earnings could be lower than 1H19.
Trimmed FY19F/FY20F earnings by 4%/7% on longer than anticipated product transition and margin pressure.
Downgrade to HOLD with lower Target Price of S$17.20; expect near term headwinds but still positive in medium term.

VENTURE CORPORATION (SGX:V03)’s 3Q19 results were slightly below expectations. We expect 4Q19 earnings to be weaker on a y-o-y basis given the high base, and even lower q-o-q as the product transition period could take longer than expected.
Given the limited upside to our revised Target Price, especially after the recent surge in share price, we downgrade Venture Corp to HOLD.
Despite potential near term hiccups, we are still positive on Venture Corp in the medium term as Venture Corp stands out for its strength in various technology domains and partnership with key industry leaders.

Venture Corp reported 3Q19 revenue of S$869.1m (+12.8% y-o-y, - 3.8% q-o-q) while net profit came in at S$85.2m (+5.5% y-o-y, -6.2% q-o-q). See Venture Corp Announcements. 3Q19 revenue accounted for 24% of our previous forecast while net profit was slightly lower at 23% on lower margins; results were slightly below expectations.
Net margins weakened to 9.8%, from 10.5% in 3Q18 and 10.1% in 2Q19, on the back of competition and pricing pressure. Margins could have been weaker if not for the group’s continued initiatives to drive productivity gains and operational efficiency.
For 9M19, revenue of S$2,701.4m (+4.8% y-o-y) and net profit of S$266.9m (+1.7% y-o-y) accounted for 74% and 73% of our previous full year forecast respectively. Net profit margin of 9.9% was lower than 10.6% for FY18.

Research and Development (R&D) expenses continued to trend lower, down 54.6% y-o-y in 3Q19 to S$8.5m, due to lower customer requirements for prototyping, tooling, non-recurring engineering (NRE), materials and related services. However, this is not a full reflection of the total amount spent on R&D as manpower costs are separately recorded under employee benefits expense.

Net cash position is even stronger now at S$802.4m (vs S$760.2m in 2Q19), driven by strong operating cash flow.

Historically, Venture Corp’s 2H is usually stronger than its 1H. However, the current volatile environment is set to persist, especially with the on-going negotiation on the trade war front. Amid headwinds from geopolitical tensions, we expect Venture Corp to book in a weaker 4Q19 given the high base in 4Q18, which recorded net profit of S$107.7m and accounted for 29% of FY18 earnings.
We are expecting net profit of about S$80m in 4Q19. We reckon that there could be some delay in the launch of new product initiatives, and the product transition period could take longer than expected on the back of the uncertain outlook.

Venture Corp will be supporting several partners in their new and key product launches over the next 12 months. More importantly, the group expects to see traction in its entry into new technology domains and ecosystems. The group will continue to invest, grow, and expand its differentiating capabilities in selected technology domains and new ecosystems through multilateral partnerships globally.
We remain positive on Venture Corp’s ability to monetise its unique offerings, know-how and hard-to-replicate ecosystems.

We have trimmed FY19F/FY20F earnings by 4%/7% as the product transition period is expected to take longer, and also on margin pressure. Our target price is reduced to S$17.20 (prev: S$18.60) on the back of the cut in earnings, still pegged to the stock’s 10-year average PE of 13.7x on FY20F earnings. See Venture Corp Share Price; Venture Corp Target Price.
Given the limited upside to share price, especially after the 10% gain in the last two weeks, we downgrade Venture Corp to HOLD.
Venture Corp’s strong net cash position should support expectations of a repeat of the higher 70-Sct dividend per share (DPS) in FY19F, which works out to a yield of 4.2%. See Venture Corp Dividend History.

We remain positive on Venture Corp’s ability to monetise its unique offerings, know-how and hard-to-replicate ecosystems in the medium to long term. Its above-average net margin is a key differentiating factor from its peers.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-11-11

SGX Stock Analyst Report HOLD DOWNGRADE BUY 17.20 DOWN 18.600