Simons Trading Research

Author: simonsg   |   Latest post: Wed, 14 Aug 2019, 9:56 PM


Venture Corporation - 4Q18 Earnings Preview ~ Phillip Morris Is Cautiously Optimistic

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  • Venture Corp is expected to report 4Q18 net profit of S$101m, in line with consensus estimate of S$103m.
  • Recent commentary from clients reinforces the view of a V- shaped recovery in 4Q18. The view becomes more mixed going into 1H19, with key client Illumina flagging a back-loaded 2019. IQOS outlook is cautiously optimistic, but the poor showing in Japan is a concern.
  • No change to our earnings estimates. Maintain HOLD and target price of S$12.90. Entry price: S$12.40.

What’s New

Expecting 4Q18 net profit of S$101m.

  • VENTURE CORPORATION LIMITED (SGX:V03) will be reporting its full-year results on 22 February after market close. 
  • For 2018, we expect net profit of S$362m on revenue of S$3.6b, or 4Q18 net profit of S$101m on revenue of S$1b, implying headline net margin of 9.9%.
  • We expect the net margin outlook to be a key focus as we are expecting some R&D activities to once again boost margins.

V-shaped qoq performance in 4Q18 highly likely.

  • As highlighted in our Jan 19 note (see report: Venture Corporation - UOB Kay Hian 2019-01-07: The Shipments Are Strong With This One; Upgrade To HOLD), Venture Corp experienced strong shipments, especially in the Retail Store Solutions and Test & Measurement/Medical segments. This was apparent from the rebound in shipments based on our tracking, and corroborated by 4Q18 results commentary from key clients such as NCR and Illumina, which both reported strong 4Q18 volumes. This was boosted by stronger-than-expected production for the year-end launch of IQOS 3.

NCR guides for strong 1Q19.

  • Venture Corp’s key client NCR Ltd (NCR) reported 4Q18 hardware revenue of US$666m (+1.7% y-o-y), driven by strong sales of its ATM solutions (US$367m, +21% y-o-y). Sales fell for Point-of-sales (-13% y-o-y) and self-checkout stations (-16% y-o-y).
  • NCR guided for a strong backlog of ATM and self-checkout station orders that will drive a strong 1Q19 production.

Illumina misses NovaSeq FY18 guidance, 2019 to be back-end loaded.

  • Illumina reported a strong 4Q18 instrument revenue of US$170m (+22% y-o-y, +10% q-o-q), which saw it deliver >100 NovaSeq units. Total number of shipments in 2018 was ~315 units, below the guidance of 330-350 units as a result of timing issues.
  • Guidance for 2019 was maintained at 330-350, although it guided for deliveries to be more back-end loaded than 2018. As reference, 2H18 revenue was 52% of full-year revenue. A softer 1Q19 Instrument sales was flagged at ~US$120m (+1.7% y-o-y, -29% q-o-q).

Test & Measurement clients report strong 4Q18, driven by China.

  • Waters (WAT) and Thermo Fisher (TMO) reported revenue of US$715m (+4% y-o-y) and US$6,507m (+8% y-o-y) respectively. Results for both was reflective of strong demand coming out of China, driven by its five-year plan to expand the quality of its healthcare services, which both expect to continue.

PMI 4Q18 results commentary is cautiously optimistic.

  • Philip Morris (PMI) reported its results on 7 February. 2018 IQOS device and accessories sales was US$0.9b (2017: US$0.9b) implying estimated 4Q18 revenue of US$125m (-68% y-o-y, +8% q-o-q). The q-o-q pickup was helped by the launch of IQOS 3, which was well-received. Heated tobacco units (HTU) shipments to Japan fell to 5.7m units (-57% y-o-y) in 4Q18. The decline was partly offset by strong HTU volume growth from Italy (0.6m units, +100% y-o-y) and Russia (1.8m units, +800% y-o-y).
  • PMI is positive on Europe as growth markets, which together with Korea, will help drive growth. No specific target was provided on IQOS’ growth outlook for 2019, despite it driving the bulk of PMI’s revenue guidance of 5% growth for 2019, which we view as cautiously optimistic. PMI will present further information on 20 February, at the CAGNY conference.

Altria positions for 2019 US launch of IQOS.

  • In its 4Q18 results commentary on 31 January, Altria provided earnings guidance that included a full roll-out of IQOS in the US. While the exact timing is uncertain, Altria has already commenced acquisition of retail space for its eventual launch.
  • PMI’s application to the US FDA is currently open for public comments, and will close on 11 Feb 19. A final ruling is generally expected after public comments are closed.

Stock Impact

4Q18 V-shaped earnings recovery priced in by market.

  • Given the shipment data and corroborating results commentary from clients, a strong 4Q18 results is a high probability. This likely includes some element of order front-loading by clients that boosted demand. We believe this has more or less been priced in by the market.

Earnings for 2019 likely to be flat at least.

  • The upward trajectory is likely to continue into 1Q19 for the Retail Store Solutions and Life Science divisions at least. Beyond that, retail store solutions could weaken, which coupled with the soft 1H19 outlook from Illumina, point to a recovery that’s more W-shaped than V-shaped for non-IQOS revenue.
  • For IQOS, our channel checks suggest the order outlook to be 10% above our current estimate. However, given the soft showing in Japan, and our caution that Italy/Russia will fully offset the decline in Japan, we leave our estimate unchanged for now.
  • Risk of further production share loss is low for 2019, as Venture Corp and FLEX have maintained a 50:50 split for the past few months. US FDA approval is not viewed as a positive catalyst as it sees the launch of older generation devices (ie IQOS 2.4, 2.4+). Channel checks verify a sizeable inventory for 2.4+, which we think PMI will exhaust first for the US launch, if possible, before placing more orders.
  • In summary, barring further economic headwinds, such as the on-going trade war, we see likely upside revision of ~3% to our 2019 earnings estimate.

Earnings Revision / Risk

  • Our earnings estimates remain unchanged for now.

Risk of higher dividend payout. 

  • We would not be surprised if management undertakes defensive moves such as issuing a special dividend. This will likely prompt a spike in Venture Corp’s share price.

Valuation / Recommendation

Maintain HOLD and target price of S$12.90. 

  • Our target price is pegged to 11x 2019F PE, based on a regression of Venture Corp’s’ PB-ROE relationship against peers.
  • Our valuation does not take into account the net cash per share of S$2.42/share as of 9M18. Included, our valuation will come close to current share price.
  • The market has largely reflected the positives in the stock, and we maintain our HOLD call.

Source: UOB Kay Hian Research - 11 Feb 2019

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