Venture Corporation - UOB Kay Hian 2020-08-11: 2Q20 Results In Line; Recovery To Continue In 2H20 But Expect Y-o-y Weakness

VENTURE CORPORATION LIMITED (SGX:V03)

Venture Corporation - 2Q20 Results In Line; Recovery To Continue In 2H20 But Expect Y-o-y Weakness

Venture Corp's 2Q20 net profit fell 23% y-o-y (+16% q-o-q) while 1H20 net profit formed 45% of our full-year estimate. The sequential recovery in 2Q20 was due to the gradual reopening of some economies since late-Apr 20 and good demand for essential products.
2H20 should continue to enjoy a h-o-h sequential recovery but could be weaker y-o-y vs 2H19. We raise our 2020F and 2021F EPS estimates by 1% and 9%.
Maintain HOLD with a 22% higher target price of S$17.64 after rolling over our valuation base year to 2021.

Venture Corp (SGX:V03)’s 2Q20 net profit of S$70.2m (-23% y-o-y, +16% q-o-q) is in line with our expectation. 1H20 accounted for 45% of our full-year forecast.
Venture Corp has also raised its interim dividend slightly to S$0.25 in 1H20, up from S$0.20 in 1H19. The sequential recovery was due to the gradual reopening of some economies since late-Apr 20 and good demand for essential products for customers in the life science, medical devices, networking & telecommunications and semiconductor-related equipment domains.
On the other hand, traditional products such as payment processing, printing, hospitality and aviation-related have suffered reduction in demand. Net margin in 2Q20 has also normalised to 10.1% (1Q20: 9.0%).

The gradual recovery in 2Q20 is expected to continue into 2H20. However, we note that 2H19 is still a high base to match, due to challenges amid COVID-19, which limits the production capacity, supply chain and demand in several domains.

Venture Corp’s R&D labs have plans to release several new products in early-21. We understand that due to more challenging and uncertain market conditions from COVID-19 and the upcoming US elections, customers are now focusing on clearing their existing inventories and have delayed new product launches in 2H20.

Citing a high level of uncertainty in the current environment, most Venture Corp's clients have not provided guidance for the full year, with only a few highlighting the outlook for 3Q20. Customers that have provided some guidance for the coming quarters include:
- Illumina, which expects sequential growth in revenue for every region in the third quarter but lower on a y-o-y basis,
- Fortive, which expects total revenue to decline by 5-8% y-o-y in the third quarter, representing a sales recovery on a q-o-q basis,
- Phillip Morris, that expects recovery in growth to be skewed towards the fourth quarter and expects 2-5% currency-neutral EPS growth in 2020.

Unsurprisingly, most of Venture Corp’s clients that have published 2Q20 results have shown a double-digit decline in revenue due to the negative impact from COVID-19. Thermo Fisher was the exemption as the group registered revenue growth of 10% y-o-y as the group benefitted from COVID-19 related revenue. Although Philip Morris’s reduced risk product (RRP) revenue grew 9.2% y-o-y, IQOS devices made up 8% of RRP revenue, down from the 14% level in 2Q19.

As at end-2Q20, Venture Corp recorded net cash at S$834.1m, forming 15% of its market cap. More importantly, Venture Corp has consistently paid the same level of dividend or better than that in the preceding year. See Venture Corp Dividend History.

We raise our 2020, 2021 and 2022 net profit forecasts to S$295m (+1.4%), S$355m (+9.3%) and S$403m (+9.2%) respectively. The breakdown of our quarterly net profit forecasts is as follows: 3Q20: S$80m, 4Q20: S$84m.
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 HOLD for Venture Corp with a 22% higher target price of S$17.64 (previously S$14.46), pegged to its long-term forward mean PE of 14.4x on 2021F earnings. We have rolled over our valuation base year to 2021F.
Entry price is S$16.00.
We expect a sequential recovery in 2H20 and net profit to decline 19% y-o-y for 2020 and rebound by 20% in 2021. The steeper increase in 2021 net profit is to account for the better-than-expected recovery of demand and supply chain post COVID-19 lockdown of economies since 2Q19.

John Cheong UOB Kay Hian Research | Joohijit Kaur UOB Kay Hian | https://research.uobkayhian.com/ 2020-08-11

SGX Stock Analyst Report HOLD MAINTAIN HOLD 17.64 UP 14.460