Venture Corporation - DBS Research 2020-08-05: Look Beyond Short-Term Earnings Volatility To Focus On Longer-Term Sustainable Growth


Venture Corporation - Look Beyond Short-Term Earnings Volatility To Focus On Longer-Term Sustainable Growth

  • Upgrade Venture Corp to BUY with higher target price of S$20.70, a non-consensus view.
  • Recovery in supply chain, worst could be over though the supply chain is not perfect yet.
  • Leaders in various technology domains doing well; Venture Corp should benefit from its partners.
  • Strong balance sheet with ample cash and negligible debt to support 70-Sct DPS payout.

Look beyond near-term volatility

  • Upgrade Venture Corp (SGX:V03) to BUY with higher Target Price of S$20.70. Our more optimistic view is premised on:
    1. Recovery in supply chain – worst could be over though the supply chain is not perfect yet.
    2. Leaders in various technology domains doing well - One of Venture Corp’s strategies is to partner with industry leaders for product developments. Venture Corp should benefit from the success of its partners.
    3. Shift in supply chain – Venture Corp is a beneficiary of the realignment of the global supply chain, given its diversified geographical footprint.
    4. Strong financials - Strong balance sheet with ample cash and negligible debt to support 70 Sct-DPS payout. See Venture Corp Dividend History.

Recovery in supply chain

Worst is over….

  • Based on our channel checks, supply chain, especially in Asia, has almost recovered to pre-COVID level.
  • China recovered swiftly after a deep slump at the start of the year. Venture Corp’s two manufacturing facilities in China (Shanghai, Pudong), which contributed less than 10% of total output were able to have c.75% of their workforce back by end-February.
  • Most of its plants are in Malaysia (Johor and Penang) where operations were capped at 50% capacity during the lockdown. But by end-April, most if not all its operating entities received exemptions to operate without headcount or working hour constraints.
  • Its Singapore operations were not affected as Venture Corp’s businesses are deemed as suppliers of both “essential products” as well as “essential services”.
  • With the lifting of the lockdowns, we expect production to be back to normal, and also the gradual recovery in the supply chain.

…but full fledge recovery held back by resurgence of COVID- 19 impacting demand.

  • However, the supply chain is still not perfect now as manufacturers like Venture Corp are still facing issues on the back of the uncertain global economic outlook. Customers are still not willing to commit to orders way in advance.

No clear demand signal, margins could be under pressure.

  • That could lead to higher costs for manufacturers like Venture Corp to fulfil orders given a shorter lead time. Order visibility is shorter now as there is no clear demand signal as the pandemic outbreak has changed buying behavior and patterns. Venture Corp’s customers include global MNCs located in Asia, with Singapore accounting for 19% and the balance from Asia-Pacific (ex Singapore).

Leaders in various technology domains doing well

Recent results mostly outperformed.

  • Recent results from tech bellwethers like Apple, Amazon, Alphabet, Facebook, TSMC, IBM and Samsung Electronics were mainly strong and beat market consensus.
  • Outside of the technology space, key players in the Test & Measurement, Medical & Devices and Life Science segments like PerkinElmer, Thermo Fisher, Waters Corporation and Philips Morris also reported strong results that outperformed street’s forecasts.

Partners with industry leaders.

  • Venture Corp’s strategy is to work closely with key leaders in their respective fields. The group supports new product introductions by existing partners across multiple selected technology domains, such as Life Science, Healthcare & Wellness, Instrumentation and Networking & Communications. For example, in the Life Science and Genomics ecosystem, Venture Corp is collaborating with its partners on the development of analytical tools for biomedical research, in the specialised fields of oncology and immunology. During the COVID-19 outbreak, Venture Corp provided critical support to one of its partners for their diagnostic instruments deployed at the frontline.
  • Though contribution to earnings could be lumpy, depending on the launch of the new product initiatives, this strategy bodes well for Venture Corp to ensure sustainability in the longer term.

Focusing on new areas of growth.

  • Other areas that Venture Corp sees deep value creation opportunities include precision medicine, non-invasive prenatal testing, healthy longevity, as well as healthcare and wellness. Within the technology space, areas of interest include 5G, robotic process automation and artificial intelligence. Hence, we expect Venture Corp’s performance to be resilient, positively linked to its customers in the various field.

Shift in supply chain

Beneficiary of realignment of the global supply chain; diversified geographical footprint.

  • The disruption to the supply chain as a result of the COVID-19 pandemic has led many manufacturers to rethink their supply sources, to balance between efficiencies, resilience, costs, and to diversify their production networks instead of relying on a limited number of suppliers. Companies could diversify their supply chain network, to adopt a China +1 strategy.
  • Venture Corp, with its strong footing in both Malaysia and Singapore, should benefit from this diversification trend in the medium term. In fact, with Venture Corp’s expertise and strength, it could even fulfil orders that its smaller competitors are unable to fulfill.
  • With its manufacturing plants in China, Malaysia and Singapore, Venture Corp has not suffered from order cancellations so far during this COVID-19 pandemic. The group was able to shift production from affected plants to other regions.

Strong Financials

Strong balance sheet with ample cash and negligible debt.

  • As at end-1Q20, Venture Corp had net cash of S$852.5m. This works out to S$2.94 per share or 16% of its current market capitalisation. In the past 10 years, Venture Corp has adopted a prudent strategy and maintained a strong net cash position which accounted for at least 10% of its market capitalisation.

Venture Corp - Earnings & Recommendation

Benefitting from switching out of banks?

  • Given the cut in dividend payout ratio for the banks, implying lower DPS and dividend yield of c.4% vs c.6% previously, there could be a switch from banks to other yield play index stocks. Venture Corp’s dividend yield is also about 4%, based on a 70-Scts DPS. See Venture Corp Dividend History.

Venture Corp is the only technology stock in the ST Index.

  • Venture Corp share price has outperformed the index, up 11% YTD, vs -22% loss for the STI, riding on the strong momentum for the Technology sector. While many companies struggle to survive amidst the pandemic, technology stocks remain afloat and the stronger ones are even thriving. The adoption of new technologies – Internet of Things, Big Data, Artificial Intelligence and 5G - are driving new demand. The pandemic has also structurally increased the need for digital transformation. Hence, outperformers like Venture Corp should continue to trend higher.

Maintain forecasts for now, pending 1H20 results; net margins could still be under pressure.

  • No changes to our numbers for now, pending the release of 1H20 results this Friday, 7 August after market close.
  • Net margins for Venture Corp could fall below 10%, given the challenges the supply chain still faces. Furthermore, the uncertain economic outlook could also affect demand. However, we continue to expect Venture Corp to emerge stronger from this pandemic.
  • Venture Corp’s expertise and its entrenched relationship with industry leaders in the various technology domains, coupled with its balance sheet strength, provide a strong foundation for the group to obtain sustainable growth. Investors should focus on the longer term benefits and look beyond the near-term earnings volatility, especially during this pandemic period.

Upgrade to BUY, worst could be over.

Sector re-rating in progress.

  • The +1SD is in line with our internal valuation peg. For the front-end semiconductor plays, which we are positive on, we have assigned a valuation peg of +1SD to +2SD. For companies further down the technology value chain, which we are generally neutral on, most of the stocks are pegged at around average PE.
  • At current level, Venture Corp is trading at 16.3x FY20F and 14.2x FY21F PE, at +0.5SD of its 5-year average PE mean. Venture Corp trades at a premium to global peers, of 14.7x FY20F and 12.1x FY21F PE. We believe that could be justified by Venture Corp’s high net margins of close to 10%, vs low single digits for its peers.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-08-05
SGX Stock Analyst Report BUY UPGRADE HOLD 20.70 UP 15.900