Venture Corporation - UOB Kay Hian 2020-11-04: Clients’ Earnings Indicate The Sequential Recovery Is Intact


Venture Corporation - Clients’ Earnings Indicate The Sequential Recovery Is Intact

  • We expect Venture Corp's 3Q20 net profit to grow 11% q-o-q on the back of the gradual reopening of markets since Apr 20 and fulfilment of orders of end products that were deemed non-essential during the lockdown.
  • The latest earnings of Venture Corp’s clients, including Thermo Fisher, Fortive and Waters, indicated strong growth of 14-23% q-o-q. Also, consensus revenue forecasts suggest strong recovery for some of Venture Corp’s clients in 2021 to levels comparable or higher than 2019.

Our forecast incorporates 11% q-o-q rise in Venture Corp's 3Q20 earnings.

  • We expect Venture Corp (SGX:V03) to report 3Q20 and 2H20 net profit of S$78m (+11% q-o-q, -8.5% y-o-y) and S$165m (+26% h-o-h, -9.3% y-o-y), respectively. The q-o-q recovery would be led by the gradual reopening of markets since Apr20 and the group working to fulfil orders from other technology domains serving non-essential end markets. This mirrors Venture Corp’s clients’ results of a sequential recovery for this quarter and short-term guidance of continued sales momentum going into 4Q20.

Venture Corp’s clients showed sequential recovery in 3Q20.

  • As expected, the latest results released by Venture Corp’s clients have shown an improvement in revenue on a q-o-q basis (refer to table in the PDF report attached below for details).
  • Notably, Thermo Fisher (TMO US) reported a strong set of results with a 23% q-o-q (36% y-o-y) revenue growth to US$8.5b, which includes US$2b in COVID-19-related revenue. Excluding the US$2b, revenue is still decent with 16% q-o-q (4% y-o-y) growth.
  • Other clients in the test & measurement industry such as Fortive (FTV US) registered strong sequential recovery in revenue at 21% q-o-q (2.3% y-o-y), with the group anticipating a 0-3% y-o-y increase in total revenue for 4Q20.
  • Similarly, Waters (WAT US) reported a 14% q-o-q and 2.9% y-o-y revenue growth with instrument sales increasing 18% q-o-q (-3.8% y-o-y).

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

  • Consensus revenue forecasts show expectations of a strong recovery in 2021, to levels comparable or higher than 2019’s for key clients in its Test & Measurement (+4.2% 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) device) form more than 50% of the group’s revenue.
  • Other domains that we think Venture Corp could see more traction include semiconductor-related equipment and networking & communications.

Illumina’s 3Q20 sequencing system revenue outperformed the group’s expectations

  • Illumina’s 3Q20 sequencing system revenue outperformed the group’s expectations, rising 23% q-o-q, but was still down 21.9% y-o-y. The sequential recovery was led by increased shipments of NovaSeq which have rebounded since 1Q20 (when some customers delayed purchases). The firm did not provide specific full-year guidance but expects a strong NovaSeq pipeline and strongest quarter this year for instrument placements going into 4Q20.

Philip Morris’ RRP revenue surged but device sales make up smaller component.

  • Reduced risk product (RRP) revenue, that includes the IQOS device and Heatsticks (HTU) sales, surged 23% y-o-y in 3Q20 with HTU shipments increasing 19% y-o-y. Philip Morris shared that IQOS devices accounted for approximately 8% of RRP net revenue ytd, lower compared to 13% in 2019 and 22% in 2018, mainly due to a naturally lower ratio of new users to existing users, longer replacement cycles and geographic mix. Some mitigating factors for lower device sales could come from its recent commercialisation of IQOS VEEV, its new e-vaping category, which was launched in New Zealand.

Strong balance sheet and good dividends limit share price downside.

John Cheong UOB Kay Hian Research | Joohijit Kaur UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-04
SGX Stock Analyst Report BUY MAINTAIN BUY 23.760 SAME 23.760