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Simons Trading Research

Author: simonsg   |   Latest post: Thu, 15 Aug 2019, 4:26 PM

 

Venture Corporation - 2Q19 in Line, Positioned to Capture Growth Opportunities; Upgrade to BUY

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  • VENTURE CORPORATION LIMITED (SGX:V03)'s 2Q19 net profit of S$90.9m (-7.2% y-o-y, flat q-o-q) is in line with our expectation and consensus, with 1H19 forming 49-50% of both expectations.
  • Near-term outlook is mixed, as the volatile environment is expected to persist, but Venture Corp has several initiatives to navigate this environment as well as several new product launches in late- 3Q19.
  • We trim our 2019F EPS and our target price by 1.2% to S$17.70, pegged to the long-term PE mean of 14.0x.
  • Upgrade to BUY on the back of recent Venture Corp share price weakness.

2q19 Results

2Q19 net profit of S$90.9m within expectations.

  • VENTURE CORPORATION LIMITED (SGX:V03) reported 2Q19 net profit of S$90.9m (-7.2% y-o-y, flat q-o-q), in line with our and consensus’ expectations with 1H19 accounting for 49-50% of both.
  • Net margin remained largely unchanged at 10.1%, where the revenue decline was offset by a decline in research and development expense.

1H19 revenue growth of 1.3% y-o-y driven by broad-based growth.

  • Venture Corp's 1H19 revenue growth was driven by broad-based growth, as diversified portfolio of customers provided resilience against headwinds from geopolitical and macro factors. We believe several new projects that were started in 2H18 also contributed to the growth.

New product launches in late-3Q19 could help to maintain profitability.

  • Several new product launches is expected in late-3Q19, such as in the test and measurement as well as the life sciences industry. As a result, we expect 4Q19 to perform better and 3Q19.

Mixed outlook.

  • Although the volatile environment due to trade war and geopolitical environment is expected to persist, Venture Corp has several initiatives to navigate this environment and will continue to diversify its value creation in the multiple ecosystems it participates in. Backed by its strong financial resources, Venture Corp is well placed to capture growth opportunities.

Stock Impact

Clients’ results suggest slowdown from a high growth phase in 2018.

  • We note that key client Illumina prior to its 2Q19 results release had announced a cut in fiscal year revenue guidance to 6% from the initial guidance of 13-14%. In addition, its 2Q19 results show that 1H19 instrument sales (which we believe Venture Corp has exposure to) declined 0.8% y-o-y.
  • While we do not see any major decline in revenue for key clients, we do see a slower pace of revenue growth in 2Q19 (similar to 1Q19) such as Thermo Fisher (2Q19: +3.9% y-o-y, 2Q18: 21.8%), Broadcom (2Q19: +10.0% y-o-y, 2Q18: +19.7% y-o-y) and Agilent (2QFY19: +2.7% y-o-y, 2QFY18: 9.4%).
  • On the other hand, Philip Morris raised its full-year diluted EPS guidance by a marginal 1.4% and also cited additional investment (compared with previous estimates) being poured into reduced risk products (RRPs) with plans for an upgraded IQOS 3 to better suit the Korean market. That said, we are unclear of the benefits to Venture Corp with regards to timeline and Venture Corp’s involvement.

Earnings Revision / Risk

Earnings forecasts trimmed slightly, factoring in the macro uncertainties.

  • We trim our earnings estimates slightly for 2019, 2020 and 2021 to S$364m (-1%), S381m (-1%) and S$399m (-1%) respectively.

Valuation / Recommendation

  • Upgrade to BUY with a revised target price of S$17.70, based on the long-term PE mean of 14.0x FY19F.

Share Price Catalyst

  • Better-than-expected net profit.
  • Higher-than-expected dividend.
  • Potential EPS accretive acquisitions.

Source: UOB Kay Hian Research - 13 Aug 2019

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Labels: Venture

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