Venture Corporation - DBS Research 2020-04-01: To Emerge Stronger

VENTURE CORPORATION LIMITED (SGX:V03)

Venture Corporation - To Emerge Stronger

Venture Corp (SGX:V03)'s factories in Malaysia and China affected by temporary shutdown.
New product introductions and new customers to cushion impact.
Exposure to Medical segment an added advantage in this pandemic crisis.
Maintain BUY; to emerge stronger on its entrenched relationship with customers and balance sheet strength.

The COVID-19 pandemic has hit the business world at an unprecedented scale and speed. It has caused the closures of businesses, the stoppage of factory outputs, and the disruption to global manufacturing industries and their supply networks. The issue is compounded with the lockdown orders and the restriction in movements, leading to a demand crisis.

As most of Venture Corp’s factories are in Malaysia, it is affected by the movement control order (MCO). The resumption of production in its China plants and the Singapore plants remaining in operation should help to mitigate some of the negative impact from its Malaysia plants.

In FY2020, Venture Corp will be supporting new product introductions from its existing partners across multiple selected technology domains, such as Life Science, Healthcare & Wellness, Instrumentation and Networking & Communications. It also expects to gain momentum with several new partners in the Life Science & Genomics and Healthcare & Wellness domains with growing contributions beyond 2020.

Venture Corp’s business segments include Medical Devices and Equipment, Healthcare & Wellness Technology, and also Life Science, Genomics and Molecular Diagnostics, which can be in high demand during this pandemic crisis.
Some countries, like Italy and Spain have already reached the limit on their medical resources. Furthermore, if R&D is required, Venture Corp can tie up with its customers to perform R&D together. Venture Corp is not new to this kind of collaborations with customers in manufacturing new products.
Venture Corp has been working with industry leaders in the various segments to develop new products. These include working with a leading laboratory analytical instrument company to manufacture their next-generation mass spectrometry instrument, and also in the Life Science domain, collaborating on a partnership with an emerging leader in the development of next-generation equipment.

Net cash position as at end-4Q19 is strong at S$713.4m (vs S$711.0m in 4Q18), driven by strong operating cash flows. This works out to S$2.46 per share or c.15% of its current market capitalisation.
Venture Corp’s strong net cash position should support expectations that the 70-Sct DPS can be sustained going forward. This represents 4.2% yield based on its current share price.

We have tweaked our earnings for FY20F/FY21F down by 5%/3% to account for the temporary shutdown of most of its Malaysia factories and to a lesser extend, its China plants. The disruption to the global supply chain could also impact margins.
We have lowered net margins to 9.9% for FY20F, and expect a gradual improvement to 10.2% in FY21F. As such, Target Price is lowered to S$15.80 (previously S$18.50), pegged to 12.5x on FY20F earnings, which is Venture Corp’s 10-year -0.5SD PE from average, down from the average PE peg, on increasingly uncertainties ahead. Maintain BUY.
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Given Venture Corp’s expertise and its entrenched relationship with the industry leaders in the various technology domains, coupled with its balance sheet strength, we expect Venture to emerge stronger from the current crisis.