Venture Corporation - UOB Kay Hian 2020-10-01: Better Growth Prospects Of Clients Warrant A Re-rating; Upgrade To BUY

SGinvestors.io

VENTURE CORPORATION LIMITED (SGX:V03)

Venture Corporation - Better Growth Prospects Of Clients Warrant A Re-rating; Upgrade To BUY

• Consensus revenue forecasts of Venture Corp (SGX:V03)’s Test & Measurement and Life Sciences/ Medical clients show a strong recovery in 2021, to levels comparable or better than in 2019. Venture Corp deserves to trade at a higher valuation, given better earnings prospects of its clients, sustainable dividend yield of 3.9% and outperformance vs peers, with net margin of about 10% even during the challenging environment in 1H20.
• Upgrade Venture Corp to BUY with a 35% higher target price or +1SD to mean PE of 19.4x on 2021F earnings.

Consensus revenue forecasts suggest strong recovery for some of Venture’s clients in 2021.

• Although full-year earnings guidances from most clients remain withdrawn - citing high levels of uncertainty, consensus revenue forecasts show expectations of a strong recovery in 2021, to levels comparable or higher than 2019’s for key clients in Venture Corp's Test & Measurement (+7.9% y-o-y) and Life Sciences/Medical (+18.8% y-o-y) domains.
• We estimate these domains (including contribution from “I quit ordinary smoking” (IQOS) devices) form more than 50% of the Venture Corp’s revenue. Other domains that we think Venture Corp could see more traction include semiconductor-related equipment and networking & communications.

New products pushed back to early-21.

• Due to uncertainties in the business environment in 2020, we understand that several new product releases have been delayed to early-21. Although we are unable to verify Venture Corp’s involvement, key clients that have announced notable product launches in 2020 include:
  1. Illumina’s Next Seq 1000 that was originally scheduled for shipping in 4Q20; and
  2. Agilent’s NovoCyte Penteon Flow Cytometer announced in Sep 20.
• Venture Corp could also benefit from rising demand for COVID-19 testing and diagnostic equipment from Thermo Fisher, which is expected to add US$1.6b in COVID-19 related revenue in 3Q20 (1H20 group revenue: US$13b) and potentially meaningful revenue in 2021.
• Additionally, we believe demand for medical devices could gradually recover in 2H20 and 2021 as medical procedures were deferred in 1H20.

Upgrade on higher valuation multiple.

• We believe Venture Corp deserves to trade at the top-end of peers’ valuations, given that it services clients that have dominant market share in their respective industries with long-term favourable dynamics (eg Illumina in the NextGen Sequencing market). This will provide the group with sustainable growth.
• In addition, compared with many other ODM/OEM players, Venture Corp’s business model focuses on a high-mix, low-volume product profile and it has a diversified customer base. This gives Venture Corp net margins of 9-10%, the highest among most peers, even during a difficult operating environment such as in 1H20 (9.6%) when revenue fell 25% on the back of an adverse impact from COVID-19.

Strong balance sheet and good dividends provide limit share price downside.

• As of end-1H20, Venture Corp recorded net cash of S$834.1m (forming 15% of its current market cap) and led the pack of US-listed peers which were mostly in net debt positions (refer to next page).
• More importantly, Venture Corp has consistently paid the same amount of dividends or better than that in the preceding year. We expect a dividend of 75 S cents/share this year, translates into an attractive dividend yield of 3.9%. See Venture Corp Dividend History.

Expect sequential recovery to continue into 2H20.

• We expect Venture Corp's net profit to rise 21.7% h-o-h in 2H20 (but down 7.8% y-o-y on a high base). The recovery would be led by a gradual reopening of markets since Apr 20 and the group working to fulfil orders from other technology domains serving non-essential end markets. This mirrors the short-termguidance from most clients of a q-o-q recovery in 3Q20.
• See Venture Corp Share Price; Venture Corp Target Price; Venture Corp Analyst Reports; Venture Corp Dividend History; Venture Corp Announcements; Venture Corp Latest News.
• See PDF report attached below for summary of Venture Corp's key clients and peer comparison.

Venture Corp is one of the top institutions net buy stocks in 3Q20. See SGX market update: Institutions Net Buyers of Technology, Retail and Tourism Stocks in 3Q20.

John Cheong UOB Kay Hian Research | Joohijit Kaur UOB Kay Hian | https://research.uobkayhian.com/ 2020-10-01

SGX Stock Analyst Report BUY UPGRADE HOLD 23.76 UP 17.640