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


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  • Although full-year earnings guidances from most clients remain withdrawn - citing high levels of uncertainty, consensus revenue forecasts show expectations of a strong recovery in 2021, to levels comparable or higher than 2019’s for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.

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 | 2020-10-01
SGX Stock Analyst Report BUY UPGRADE HOLD 23.76 UP 17.640