Venture Corporation - DBS Research 2020-11-09: Strong Demand Momentum

VENTURE CORPORATION LIMITED (SGX:V03)

Venture Corporation - Strong Demand Momentum

Venture Corp's 3Q20 results up for the second consecutive quarter but net margins dipped below 10%.
Expecting another quarterly growth in 4Q but at a more muted rate.
Demand momentum to remain strong in FY21; launch of new products a key driver.

Venture Corp (SGX:V03) reported 3Q20 net profit of S$80.2m (+14.2% q-o-q, -5.9% y-o-y) on the back of 18.1% q-o-q increase (-5.8% y-o-y) in revenue to S$818.4m. On a 9-month basis, revenue and net profit accounted for 63% and 66% respectively of our full year forecasts, below expectations, as we were expecting much stronger growth.

Venture Corp's 3Q20 net margins of 9.8% was similar to 3Q19 but lower than 10.1% in 2Q20. This could be due to the product mix. In 2Q20, the focus was mainly to fulfil orders for the essential goods which tend to have a higher margin.
In 3Q, besides fulfilling orders for Portfolio 1, which include Life Science, Medical Devices and Equipment and Healthcare & Wellness which generally commands higher margins, Venture Corp also fulfilled orders from Portfolio 2, which generally includes lower-margin projects from the Electronics Manufacturing Services segment.

Venture Corp’s net cash position of S$829.7m remained healthy, up 16.3% from S$713.4m at end-December 2019, even after a higher interim dividend payment of S$72.5m in September 2020. 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.

3Q20 was the first full quarter without much of the disruption from COVID-19 as demand and supply were affected by the pandemic in 1H20. With the situation normalising in 3Q20, Venture Corp was able to fulfill most of the order backlog from 1H20, for both essential and non-essential products. Venture Corp was able to fulfill the backlog orders much faster than our earlier expectations of at least till the end of 2020.

As most of the order backlog has been fulfilled, we do not expect the repeat of 3Q20’s 18.1% and 14.2% q-o-q growth in revenue and net profit respectively in 4Q20.
Given that demand is still strong, we expect 4Q20 to register a third consecutive quarter of earnings growth, but at a more muted rate of 8% q-o-q, vs 16.4% in 2Q20 and 14.2% in 3Q20.

New products/ services initiatives in 2021 is expected to drive FY21 higher. A number of these have been pushed back to FY21 due to the demand and supply disruption as a result of the COVID-19 pandemic. New products/ services engineered and developed in Venture Corp’s R&D labs are scheduled for release into end markets by its partners and customers in several technology domains. These include fast-growing domains and ecosystems such as Life Science & Genomics, Healthcare & Wellness, as well as COVID-19 related detection, testing, diagnostics products and solutions.
Demand for Medical Devices & Equipment, Networking & Communications and Semiconductor-related Modules & Equipment remains strong.

Given that most of the order backlog has been fulfilled and the expectation of a more muted 4Q20, we have trimmed our Venture Corp's FY20F/FY21F earnings forecast by 8%/6%.
Overall, we are still expecting a stronger 2H20, contributing 56% to our FY20F earnings projection. Beyond FY20F, demand momentum is expected to remain strong. Besides new product initiatives, other key growth areas for Venture include Life Science, Medical Devices & Equipment, Networking & Communications and Semiconductor-related Equipment domains.
In the longer term, the diversity of Venture Corp’s capabilities and technical skills and expertise will continue to drive the group to greater heights. Maintain BUY.

On the back of strong demand momentum and that the worst is already behind us, assuming COVID-19 induced lockdowns and disruptions do not deteriorate further, we have raised our target price valuation target to 20.3x (previous 16.3x), which is +2SD of its average forward PE on FY21 earnings. This works out to a target price of S$24.30.
See Venture Corp Share Price; Venture Corp Target Price; Venture Corp Analyst Reports; Venture Corp Dividend History; Venture Corp Announcements; Venture Corp Latest News.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-11-09

SGX Stock Analyst Report BUY MAINTAIN BUY 24.30 UP 20.700