• Keep BUY, new SGD18.26 TP from SGD19.40, 22% upside with c.5% FY23F yield. We remain positive on Venture Corp even though we anticipate a tough 2Q23 earnings as valuations remain compelling at -1SD (c.13x forward P/E) of its historical mean P/E (16x forward P/E). We expect 2Q23 to remain weak for VMS, on weak macroeconomic environment and slow demand from its customers. Nonetheless, we maintain BUY for the stock, in view of an upcoming global recovery and muted valuations.

• We anticipate 2Q23 to be weak for VMS. 1Q23 has seen softer overall demand on a weaker customer outlook, with most domains seen declining. We do not expect 2Q23 to be much improved and believe overall customer demand remains weak. US GDP growth for 2Q23, based on consensus expectation, is only a slight uptick at 2% from 1.8% in 1Q23. Similarly, S&P 500’s earnings per share for 2Q23 based on Bloomberg data is USD53.51 (-2% QoQ, -1% YoY). Both indicators are likely to suggest that demand from large international corporate clients may have remained largely comparable from 1Q23.

• Cut FY23-25F earnings by 8% each. In reflection of a weaker-than- expected 2Q23 demand, we lower our revenue forecasts by 8% while maintaining our margin assumptions. We do not expect margins to be under significant pressure as customer programmes remain largely high value with minimal change in profitability. This results in an 8% earnings cut overall. While FY23F earnings decline is now 12% YoY, we still expect net profit to grow 5% YoY in each of FY24F-25F. Our TP is correspondingly reduced by 6% from SGD19.40 as we roll over our earnings base from 16x FY23F P/E to blended FY23-24F P/E.

• Still a BUY. We continue to be positive on the stock in anticipation of global economic recovery and compelling valuations. Based on our economics desks’ view, US and global growth are at the cusp of recovery and we expect US and global growth will recover by summer 2023. US inventories-to-shipment ratios are stabilising, suggesting early stages of recovery. The US housing market is already recovering and will likely strengthen further in 2H23. The US consumer market will remain resilient in 2H23 as labour market conditions will remain well-supported, household balance sheets will remain strong, and robust wealth effects from rising US stocks and residential housing prices will offset potential declines in household savings rates. We like VMS for its superior margins, net cash position (SGD2.78 per share), attractive dividend yield, muted valuation (at -1SD of its historical mean), and strategy of offering differentiating and high-value solutions to customers.

• Downside risks to our forecasts include a softer and/or later-than-expected global recovery, and decelerating global demand. As VMS’ ESG score is 3 out of 4 – on par with our country median – we apply a 0% discount or premium to its intrinsic value to derive our TP.

Source: RHB Research - 20 Jul 2023