Venture Corp - Maybank Kim Eng 2020-03-29: Recovery Delayed; Downgrade To HOLD

VENTURE CORPORATION LIMITED (SGX:V03)

Venture Corp - Recovery Delayed; Downgrade To HOLD

We cut FY20-21E EPS by 13-20% to factor in
1. Venture Corp (SGX:V03)’s partially shut factories in Malaysia and
2. increasingly cautious customer and supply chain outlook.
We expect consensus to cut earnings expectations as Venture Corp has historically underperformed expectations during times of weakening economic fundamentals.

Our ROE-g/COE-g Target Price falls to SGD13.90, based on 1.5x FY20E P/B (prev: 2x) as we raise COE assumption to 9% (prev: 8%) to account for the stock’s increased volatility. Downgrade to HOLD from BUY.
On FY20E basis, Venture Corp is trading on 5% yield and 1.6x P/B, which are near long-term mean. During the GFC, Venture Corp troughed at 0.6x forward P/B and 12.4% yield.

Venture Corp’s facilities in Malaysia are near totally shut from 18-Mar to 14-Apr due to a government-directed movement control order (MCO) to curb the spread of Covid-19. Production of medical goods likely would have continued, as these are exempted from the MCO.
Malaysia accounts for at least 65% of Venture Corp’s production capacity. A few customers that were previously upbeat, such as Honeywell, Thermo Fisher and Broadcom have turned cautious. We fear that an increasingly uncertain environment increases the risk that customers may defer new product introductions (NPIs) till economic conditions improve.

We still like Venture Corp for its
1. net cash to equity position of 29%,
2. free cash flow that fully funds FY20E DPS of SGD0.70, and
3. diversified customer base (top 20 customers account for 70-80% of revenue).
Specifically, a snapshot of 16 well known customers suggest most are decent paymasters, and have healthy liquidity, leverage and interest coverage ratios.

We expect volatility to persist, and do not rule out that investors may be able to pick up the stock at better valuations. Venture Corp is currently trading at a FY20E yield of 5% and P/B of 1.6x which are around long-term mean. Click on view full report button below to see peer comparison table (Fig8).
For comparison, forward yield peaked at 12.4% while forward P/B troughed at 0.6x during GFC.
See Venture Corp Share Price; Venture Corp Target Price; Venture Corp Analyst Reports; Venture Corp Dividend History; Venture Corp Announcements; Venture Corp Latest News.
Key risk to our view is if we have under or overestimated forecasts amid a highly dynamic environment with many moving parts.