Venture Corporation - CGS-CIMB Research 2020-08-08: FY21F Could Be A Game Changer

VENTURE CORPORATION LIMITED (SGX:V03)

Venture Corporation - FY21F Could Be A Game Changer

Venture Corp's 1H20 net profit was below our expectations at 39% of our full-year forecast but only slightly below consensus expectations at 42%.
Interim DPS was raised to S$0.25 from S$0.20 in 1H19, and Venture Corp guided that the steady recovery seen in 2Q20 is expected to continue into 2H20.
Reiterate ADD on Venture Corp on its long-term prospects and bottom-line focused strategy.

Venture Corp (SGX:V03)'s 1H20 net profit was below our expectations at 39% of our FY20F forecast. Against consensus expectations, 1H20 net profit was slightly below at 42%. 1H20 revenue fell 25.5% y-o-y due to disruptions in the global supply chain and factory lockdowns in Malaysia, Spain, the US and China caused by measures to combat the COVID-19 pandemic.
Although Venture Corp managed to mitigate the impact, orders from some customers operating in non-essential end-market segments were pushed back to later quarters, hence the 2.9% q-o-q revenue growth in 2Q20.
From May onwards, production has largely resumed at Venture Corp’s factories.
The key positives in Venture Corp's results are:
1. better product mix and judicious cost control, leading to 1H20 net profit margin of 9.6%, just 0.3% pt lower than 1H19;
2. net cash balance grew to S$833.0m at end-Jun 2020 (end-Dec 2020: S$713.4m), and
3. interim DPS raised to S$0.25 (1H19: S$0.20).

With the gradual reopening of some economies since late-Apr 2020, Venture Corp is working to fulfill customers’ orders from the other technology domains serving non-essential end-markets. The steady recovery seen in 2Q20 is expected to continue into 2H20, in our view.
Demand from customers in the life science, medical devices & equipment, networking & communications, and semiconductor-related equipment domains remains strong.

We lower our Venture Corp's FY20F EPS given the lower-than-expected 1H20F earnings due primarily to COVID-19. However, we reiterate our ADD call on Venture Corp with a higher Target Price of S$20.14, based on 15x (13-year average) FY21 EPS. See PDF report attached below for earnings revision details and Venture Corp's peer comparison table. The multiple change (previously 12.5x, 0.5 s.d. below its 13-year forward average P/E of 15x) reflects a potential re-rating in FY21F if new product introductions by Venture Corp are successful.
Venture Corp has guided that its R&D labs have plans to subsequently release a number of newly developed products into manufacturing commencing early-2021.
See Venture Corp Share Price; Venture Corp Target Price; Venture Corp Analyst Reports; Venture Corp Dividend History; Venture Corp Announcements; Venture Corp Latest News.
Worsening of the COVID-19 outbreak remains a downside risk.
Net cash balance sheet supports Venture Corp’s ambitions to sharpen its competitive advantage, either through talent acquisition or selective M&As, as well as our 3.72% dividend yield forecasts over FY20-22F.

William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-08

SGX Stock Analyst Report ADD MAINTAIN ADD 20.14 UP 16.780