Venture Corporation - UOB Kay Hian 2019-11-11: 3Q19 Slight Miss On Weaker Margins, Expect A Soft 4Q19; Downgrade To HOLD

VENTURE CORPORATION LIMITED (SGX:V03) | SGinvestors.io VENTURE CORPORATION LIMITED (SGX:V03)

Venture Corporation - 3Q19 Slight Miss On Weaker Margins, Expect A Soft 4Q19; Downgrade To HOLD

  • Venture Corp's 3Q19 net profit (+5.5% y-o-y, -6.2% q-o-q) missed our and consensus expectations by 6.5%, with 9M19 net profit forming around 73% of both full-year forecasts.
  • Near-term outlook is expected to be weak as the volatile economic environment has caused margin pressure and clients to delay several new product launches.
  • Downgrade to HOLD. We trim our 2019-20 EPS forecasts by 4-9% and our target price by 5.8% to S$16.67 (rolling valuation to 2020, based on 14.0x long-term mean PE).
  • Entry price: S$15.10.



Venture Corp's 3Q19 RESULTS


3Q19 net profit of S$85.2m is slightly below expectations.

  • Venture Corp (SGX:V03) reported 3Q19 net profit of S$85.2m (+5.5% y-o-y, -6.2% q-o-q), slightly below our and consensus’ expectations, with 9M19 net profit accounting for 73% of both full-year forecasts. See Venture Corp Announcements; Venture Corp Latest News.
  • Revenue grew 12.8% y-o-y but the positive impact was offset by net margin declining 0.7% y-o-y, mainly due to competition and pricing pressure. In addition, research and development expense showed a sharp decline of 54.6% y-o-y.

Near-term challenges remain.

  • For the next 12 months, uncertainties in the business and geopolitical environment are expected to persist. We understand that several new product launches that are expected in 2H19 will be pushed back further. As a result, we expect 4Q19 performance to be similar as 3Q19’s.
  • Venture Corp continues to see some efforts to shift supply chain flows by OEM for tariff mitigation and it does take advantage of these shifts.

2019 net profit expected to decline from a high base, in line with slower pace of growth of key clients.

  • Our revised net profit of S$350.1m suggests a 6.1% y-o-y decline, mainly due to pricing pressure on a softer economic outlook and fewer new product launches. We are expecting 4Q19 net profit to fall 2% q-o-q and 23% y-o-y due to much higher base of 4Q18. This is also in line with the slower pace of growth of its key clients.
  • Our compilation of consensus revenue forecasts for 16 of Venture Corp’s clients shows that consensus has lowered their revenue growth for 2019 from 7.5% at the start of the year to 3.0% as of 8 Nov 19.


STOCK IMPACT


Slower pace of growth of key clients.

  • While the 3Q19 results releases of most of Venture Corp’s key clients showed positive revenue growth, we note the pace of revenue growth has slowed from the high growth phase in 2018:
    • Thermo Fisher (3Q19: +5.9% y-o-y, 3Q18: +15.7% y-o-y),
    • Broadcom (3Q19: +8.9% y-o-y, 3Q18: +13.4% y-o-y),
    • Trimble Navigation (3Q19: - 1.4% y-o-y, 3Q18: +18.7% y-o-y) and
    • Keysight (3QFY19: +10.2% y-o-y, 3QFY18: +14.6% y-o-y).
  • Our compilation of consensus revenue forecasts for 16 of Venture Corp’s clients shows that consensus has lowered their revenue growth for 2019 from 7.5% at the start of the year to 3.0% as of 8 Nov 2019.


EARNINGS REVISION/RISK

  • We reduce our net profit estimates for 2019-21 to S$350m (-4%), S$346m (-9%) and S$362m (-9%) respectively as we factor in the macro uncertainties and margin erosion.


VALUATION/RECOMMENDATION



SHARE PRICE CATALYST

  • Better-than-expected net profit.
  • Higher-than-expected dividend.
  • Potential EPS accretive acquisitions.





John Cheong UOB Kay Hian Research | Joohijit Kaur UOB Kay Hian | https://research.uobkayhian.com/ 2019-11-11
SGX Stock Analyst Report HOLD DOWNGRADE BUY 16.67 DOWN 17.700



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