Venture Corporation - DBS Research 2020-08-11: Strong Demand, Supply Chain Recovery To Lift 2H20

VENTURE CORPORATION LIMITED (SGX:V03)

Venture Corporation - Strong Demand, Supply Chain Recovery To Lift 2H20

Commendable 1H20 results with 2Q20 margins back to 10% level; higher DPS of 25cts declared.
Focus on fulfilling orders of essential goods and gradual resumption of non-essentials; NPIs pushed back to early 2021.
Expect stronger 2H20 on strong demand and steady recovery of supply chain.

Venture Corp (SGX:V03)'s 1H20 revenue fell 25.5% y-o-y to S$1365.7m, affected by disruptions to the global supply chain and factory lockdowns in Malaysia, Spain, US and China caused by the COVID-19 pandemic. Orders for some customers operating in non-essential end market segments were pushed back.
1H20 net profit eased 28.2% to S$130.5m, translating to net margin of 9.6%. We deem it in line with our forecasts and expect a stronger 2H20.
Surprisingly, higher DPS of 25Scts was declared (vs 20Scts last year).

Despite the difficult operating environment, the group delivered a strong sequential quarterly recovery. This was underpinned by its resilience due to a diversified customer portfolio and nimble adaptability to business changes. On a q-o-q basis, Venture Corp recorded net profit of S$70.2m (-22.7% y-o-y, +16.4% q-o-q), on revenue of S$692.7m (-23.3% y-o-y, +2.9% q-o-q). 2Q20 net margins improved to 10.1% from 9.0% in 1Q20, which is similar to 2Q19.

Venture Corp continued to maintain a healthy net cash position of S$833.0m, up 16.8% from S$713.4m at end-December 2019. Its net cash now accounts for c.15% of its market capitalisation. With improved cash level, Venture Corp is in a stronger position to further enhance its technological capabilities and propel the group to the next level of excellence.

With the supply chain almost back to normal, Venture Corp will continue to focus on fulfilling orders for essential goods in 2H20. Demand for essential goods such as ventilators, PCR (Polymerase Chain Reaction) equipment used in laboratories, networking and diagnostic equipment saw demand surge by multiple folds.
Though demand is strong, due to the shortage of materials and parts some orders were not fulfilled and some customers were on allocation basis. This strong demand trend, especially for the medical equipment segment, is expected to last beyond 2020 due to the COVID-19 pandemic that is expected to be prolonged.
In the semiconductor space, Venture Corp has gained more traction with a few new customers onboard. Venture Corp builds module that goes into the manufacturing of semiconductor equipment used for the manufacturing and testing of chips. These chips are used in areas like networking, personal computer (PC) processor and gaming machines that are in high demand, especially during this pandemic period.

The supply chain was badly affected from February to April but recovered strongly in May and June, and this trend is expected to continue in 2H20. With the steady recovery of the supply chain, Venture Corp is also working to fulfil its customers’ orders from the other technology domains serving non-essential end markets, for example the consumer goods segment.

A number of new product initiatives (NPI) will be pushed back to early next year as the group continues to focus on fulfilling outstanding orders, both for the essential and non-essential goods and service segment. A key differentiating factor for Venture Corp is its strong research and development (R&D) capabilities. One of Venture Corp’s strategies is to partner with industry leaders for product developments. Venture Corp’s R&D labs plan to release a number of newly developed products for manufacturing commencing in early 2021.

We maintain our forecasts despite 1H20 net earnings accounting for only 41% of our FY20F estimates. We are expecting a stronger 2H20 on the back of strong demand and steady recovery of the supply chain. Our Target Price of S$20.70 for Venture Corp is pegged to +1SD of its average forward PE on FY21 earnings.
See Venture Corp Share Price; Venture Corp Target Price; Venture Corp Analyst Reports; Venture Corp Dividend History; Venture Corp Announcements; Venture Corp Latest News.
Going forward, key growth areas for Venture Corp include Life Science, Medical Devices & Equipment, Networking & Communications and Semiconductor-related Equipment domains.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-08-11

SGX Stock Analyst Report BUY MAINTAIN BUY 20.700 SAME 20.700