Venture Corporation - UOB Kay Hian 2020-02-24: Expect Better Prospects Backed By 4.2% Yield; Upgrade To BUY

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

Venture Corporation - Expect Better Prospects Backed By 4.2% Yield; Upgrade To BUY

  • We expect an earnings recovery for Venture Corp in 2020, from potential new product launches and stabilisation in the earnings of its clients. The COVID-19 outbreak’s impact on its business operations will be limited compared with other listed EMS companies in Singapore, making it a more defensive play.
  • Furthermore, Venture Corp has a solid net cash position and offers an attractive 2020 dividend yield of 4.2%.



Expecting earnings recovery in 2020, instead of a decline previously.

  • We were initially more conservative of Venture Corp (SGX:V03)’s earnings prospects on the back of an uncertain geopolitical environment and soft economic outlook that resulted in a series of consensus downgrades for its clients’ earnings forecasts in 2019.
  • While the uncertain business environment persists, we see a more positive outlook for Venture in 2020 on the back of the phase one trade deal between US and China which could translate into a better business environment for its clients and stabilisation in earnings of its clients in the latest report season.
  • Unlike 2019, we have not seen a major reduction in consensus estimates post the earnings release of its clients in Jan-Feb 20. Furthermore, some of its clients are expecting low-single-digit revenue growth for 2020:
    1. Agilent guided for 6.5% growth for 2020,
    2. Keysight expects 1Q20 growth of 4-6%,
    3. Thermo Fisher expects 4-6% growth for 2020, and
    4. Philip Morris guided for 5% growth for 2020.

Potential NPIs this year from product launch delays in 2019.

  • Due to the uncertainties in the business and geopolitical environment in 2019, there were several new product introductions (NPIs) that were pushed back, which we believe could flow into 2020. Also, the phase one trade deal may give its clients a clearer outlook for decision making.
  • Key clients that have notable new product launches this year include Philip Morris (IQOS MESH in 3Q20) and Illumina (NextSeq 2000 in 1Q20 and NextSeq 1000 in 4Q20).

Limited impact to business operations amid COVID 19 outbreak compared to peers and potential to capture businesses looking to relocate to Southeast Asia.

  • Venture Corp’s main production facilities are located in Malaysia and Singapore, while it does not disclose the revenue contribution from China, we reckon its presence there is small given that the site area of the production facility there makes up only 6% of the group’s total global site area. Therefore, we believe the impact towards its business operations would be limited, making it a more defensive play amid the COVID 19 outbreak.
  • In addition, Venture Corp is in a better position to benefit from businesses looking to relocate production to Southeast Asia.

Strong balance sheet and attractive dividend yield provide limited downside.

  • As of end of 3Q19, Venture Corp recorded a net cash position at S$802.4m, forming 16% of its market cap.
  • More importantly, Venture Corp has consistently paid the same level of dividend or better than that in the preceding year. It has paid a total dividend of 70 S cents in 2018 and we forecast a similar level for 2019 and 2020 which translates to a dividend yield of 4.2%. See Venture Corp Dividend History.


EARNINGS REVISION

  • We raise our net profit estimates 2020 and 2021 to S$370m (+6.9%) and S$375m (+3.5%) respectively as we factor in higher revenue from a positive outlook for its clients and new product launches. Thus, we forecast 5.7% y-o-y earnings growth in 2020, in line with the outlook of its clients.


SHARE PRICE CATALYST

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


VALUATION/RECOMMENDATION








John Cheong UOB Kay Hian Research | Joohijit Kaur UOB Kay Hian | https://research.uobkayhian.com/ 2020-02-24
SGX Stock Analyst Report BUY UPGRADE HOLD 19.62 UP 16.670



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