Venture Corporation - UOB Kay Hian 2020-04-01: Factoring In Supply Disruption From COVID-19

VENTURE CORPORATION LIMITED (SGX:V03)

Venture Corporation - Factoring In Supply Disruption From COVID-19

In contrast to one month ago when prospects were improving for Venture Corp (SGX:V03), the escalation of the COVID-19 outbreak into a global pandemic has now thrown some uncertainties into the company’s outlook.
Despite its solid positioning, we expect supply disruption to impact Venture Corp’s near-term earnings. Several customers have started to turn cautious.

We slash our 2020 EPS by 16% as we factor in about two months of supply disruption.
Maintain BUY but cut target price by 22% to S$15.50.

Malaysia started a nationwide lockdown on 18 Mar 20 for one month and this is expected to impact Venture Corp’s production as the majority of its manufacturing capacity is located in Malaysia. We understand that although manufacturers for essential items are allowed to continue operations, they will be subject to a restriction of a 50% workforce.
Assuming 50% lesser production for one full month, could translate into a loss of revenue of 4.2%. For 2019, Asia Pacific (ex-Singapore) contributed 76% of revenue. We reckon revenue from Asia Pacific mainly comes from Malaysia, given that its Malaysia footprint forms 78% of its total site area (US-11%, Singapore-5% and China-6%).

We note that several customers such as Broadcomm and Thermo Fisher that were bullish previously have turned more cautious in their recent outlooks. In addition, Broadcomm has pulled its full year guidance due to uncertainties over the impact of the COVID-19 outbreak.
Based on Venture Corp’s segmental revenue breakdown, we see that “Portfolio B”, which contributed around 53% of 2019 revenue, is particularly more vulnerable to the global economic slowdown.
To recap, “Portfolio B” consists of instrumentation, test & measurement, networking & communications, security & safety, building automation, industrial IoT, fintech & advanced payment systems, computing & productivity systems, advanced industrial technology, printing & imaging etc.

On the other hand, we think that the demand for healthcare-related products such as ventilators, testing kits, genome sequencing machines and chips used in healthcare devices could remain robust amid the COVID-19 outbreak.
Venture Corp’s “Portfolio A” should enjoy better demand; it involves life science, genomics, molecular diagnostics, medical devices & equipment, health & wellness technology, lifestyle consumer tech, health improvement products etc.

As at end-19, Venture Corp recorded a net cash position at S$713.4m, forming 18% of its market cap. More importantly, Venture Corp has consistently paid the same level of dividend or better than that in the preceding year.

In our previous note, we highlighted that Venture Corp’s earnings in 2H20 would be supported by new production introductions. Although delays in product launches from Venture Corp’s key clients remain to be seen (eg Phillip Morris: IQOS Mesh, Illumina: NextSeq 2000 and NextSeq 1000), in light of the global escalation of the COVID 19 outbreak which has led to an uncertain business environment, we believe there could be a sense of caution over the release of new products.
Apart from the risk of clients putting a pause on forthcoming product launches, companies may also review budgets, especially clients that may see a lower demand from end-users.

We expect COVID-19 to impact Venture Corp’s near-term earnings; several customers have turned cautious recently and we believe sentiment could worsen if the COVID-19 outbreak persists. Recent customer outlooks/action include:
1. Broadcomm withdrawing its full-year guidance on 12 Mar 20, due to intensifying uncertainties as a result of COVID-19, and
2. Thermo Fisher’s guidance on full-year revenue growth of 5% y-o-y for FY20 (issued on 30 Jan 20), but this has not included any potential impact from the COVID-19 outbreak.
We note that the majority of Venture Corp's clients are in the US and given the escalation of the outbreak in the country, UOB Global Economics and Markets Research team is now expecting US real GDP growth to contract by 4.1% for 2020. We also highlight that 32% of the PMI’s reduced-risk product revenues (which includes the IQOS device) are contributed by countries in the Europe Union, the centre of the global pandemic.

We have reduced our 2020, 2021 and 2022 earnings estimates by 16%, 10% and 1% respectively on the back of lower revenue due to the supply disruption from COVID-19. For 2020, we expect around 2 months of supply disruption, especially from the manufacturing plant in Malaysia.
See Venture Corp Share Price; Venture Corp Target Price; Venture Corp Analyst Reports; Venture Corp Dividend History; Venture Corp Announcements; Venture Corp Latest News.

Maintain BUY but cut target price by 22% to S$15.50 (previously S$19.80), based on 14.3x 2020F PE, pegged to its long-term forward mean PE and down from 15.4x (+ 0.25SD), to reflect more neutral prospects.

John Cheong UOB Kay Hian Research | Joohijit Kaur UOB Kay Hian | https://research.uobkayhian.com/ 2020-04-01

SGX Stock Analyst Report BUY MAINTAIN BUY 15.50 DOWN 19.800