Venture Corporation - Phillip Securities 2019-12-16: Robust Balance Sheet Supports DPS Growth


Venture Corporation - Robust Balance Sheet Supports DPS Growth

  • A beneficiary of supply chain disruption in China from securing more customers and projects.
  • A robust balance sheet with strong cash generation to support dividend growth, we expect FY20e DPS to increase by 14% to S$0.8/share.
  • Expect margins to be softer due to pricing pressure from existing customers.
  • Valuation is attractive against its peers due to its superior ROE, margins and balance sheet.
  • Maintain ACCUMULATE with an unchanged target price of S$17.18. There are no material changes to our forecast. Our valuation is based on a 14x PE multiple.

Venture Corporation - Background

  • VENTURE CORPORATION LIMITED (SGX:V03) was founded in 1984 as a global electronics manufacturing services (EMS) provider. Today, Venture Corp capabilities were expanded from assembly and manufacturing into research, design and development, product and process engineering, design for manufacturability, supply chain management, as well as product refurbishment and technical support across a widely diversified range of high-mix, high-value and complex products.
  • Headquartered in Singapore, Venture Corp comprises more than 30 companies with global clusters in Southeast Asia, Northeast Asia, America and Europe and employs over 12,000 people worldwide.
  • See Venture Corp Share Price; Venture Corp Announcements; Venture Corp Latest News.

Venture Corporation - 2020 Investment Merits/ Outlook

Benefitting from supply chain disruption through customer & project wins.

  • The on-going electronics supply chain disruption in China due to the Sino-US trade war, allowed Venture Corp to capitalise on its vast SEA production facilities. The disruption has allowed Venture Corp to expand its customer base from c.100 to c.130 and enjoy new project wins within new and existing customers.
  • Venture Corp expects new and several key products launch over the next twelve months. Anticipating these launches, we adjusted both FY19e/FY20e revenue upwards by 2.5% from our previous earnings report.
  • Venture Corp recently acquired a new customer, a young technology company recently listed in the United States with a market capitalisation of ~US$6bn.

Robust balance sheet allows for dividend growth.

  • Net cash position improved 5% q-o-q to S$802mn, cash now makes up 18% of Venture Corp’s market capitalisation. We expect Venture Corp to increase dividends in FY20e as it is supported by strong cash flow from operations of S$386mn. We forecast Venture Corp to raise its dividends to S$230mn or an increase of DPS by 14% to S$0.8 /share this is an increase of S$28mn compared to the previous year. See Venture Corp Dividend History.
  • Dividend payout ratio rises to 61%.

Margins may come under pressure.

  • Venture Corp net margins fell 6.7% y-o-y to 9.8% due to increasing pricing pressure from existing customers. Although only less than 2% of total revenue is directly impacted by the trade war, we suspect the repercussions may be slightly greater.
  • Anecdotally, we gathered that customers have been using the trade war as a reason to pressure the electronics supply chain to lower prices, even if their products are not affected by existing tariffs. We expect this trend to continue and hence expect near-term softness in net margins.
  • Venture Corp still boasts an impressive profit margin of 9.8% (vs 1.5% average U.S. listed peers).

Attractive entry point.

  • We think it is an attractive entry point now as Venture Corp is currently trading around -1SD of its 10-year mean. Our valuation is based on a 14x PE multiple of FY19e earnings, we peg Venture Corp to the simple average of its US-listed peers. We believe our valuation is conservative given Venture Corp’s superior return on equity, profit margin and balance sheet.


Alvin Chia Phillip Securities Research | 2019-12-16