Venture Corporation - Maybank Kim Eng 2019-11-11: Earnings Recovery May Take Longer; Downgrade To HOLD


Venture Corporation - Earnings Recovery May Take Longer; Downgrade To HOLD

Trim forecasts/Target Price to reflect more challenging times

  • Given the limited upside to our revised Target Price after the 12% share price gain over the past 3 months and more challenging near-term operating environment, we downgrade Venture Corporation (SGX:V03) to HOLD.
  • We lower FY20-21E EPS by 3-9% to factor in a slower recovery and weaker margin assumptions and hence lower our ROE-g/COE-g Target Price by 10% to SGD16.91 (1.8x FY20E P/B, previously 2.1x).
  • Venture Corporation's 3Q19 PATMI (+6% y-o-y) was in line with our/consensus estimates due to the low 3Q18 base.
  • A worsening outlook is the key downside risk.

3Q19 earnings helped by low base effect

  • Venture Corporation's 3Q19 revenue/PATMI rose 13%/6% y-o-y, due to a low year ago base. However, stripping out FX gains and adjustments for tax overprovision in previous years, core 3Q19 PATMI would have been flat y-o-y. See Venture Corp Announcements.
  • While still industry leading, net margin (ex-FX gains and tax adjustments) fell 1.1ppt to 9.3% amid pricing pressure and increased competition, partially offset by productivity gains.

More headwinds in the near term

  • Venture Corporation’s earnings performance in the next two quarters may be lacklustre due to:
    1. high-base comparisons; and
    2. as earnings recovery could take longer than expected.
  • Venture Corporation believes over the next 12 months, some uncertainties in the business and geopolitical environment may remain unabated. As the capex environment remains weak, new products may receive lacklustre end-market take-up, or their introduction may even be delayed. Collectively, these may slow the pace of an earnings recovery.

Await lower entry point/upside earnings catalysts

  • Near-term share price performance may be pressured as we see risks to consensus earnings estimates. Assuming fundamentals do not deteriorate further, we recommend taking profit and awaiting a materially lower entry point. See Venture Corp Share Price; Venture Corp Target Price.
  • Venture Corporation continues to execute well on its controllable factors, such as:
    1. deepening engagement with existing customers;
    2. winning new customers; and
    3. rendering support to customers who are shifting supply chains out of China to avoid tariffs.
  • Cumulatively, these should aid growth when the operating environment recovers.

Lai Gene Lih CFA Maybank Kim Eng Research | 2019-11-11
SGX Stock Analyst Report HOLD DOWNGRADE BUY 16.91 DOWN 18.850