• 1Q16 within expectations
• Pursuing sustainable growth
• Reiterate BUY

Solid margins despite higher effective tax rate

Venture Corporation Ltd (VMS) 1Q16 results were within expectations as revenue grew 3.6% YoY to S$630.7m, mainly driven by Test & Measurement/Medical & Life Science/Others (TMO) segment. As 1Q16 operating expenses grew at a slower pace of 3.1%, VMS’ profit before tax and PATMI rose 10.7% and 10.1% to S$42.5m and S$35.8m, respectively. The growth was registered despite a 15.6% jump in income tax expense to S$6.6m.

VMS’ YoY improvement in PBT and net margins by 0.4ppt and 0.3ppt to 6.7% and 5.7%, respectively, was driven by management efforts to increase productivity and also through the pursuit of value creation for its customers. Although 1Q16 PATMI only formed 21.6% of our FY16 forecast, we deemed this set of results in-line because the first quarter has historically always been one of the weaker periods in any given year.

Sustainable growth through strategy of value creation

Looking ahead, we expect VMS’ steady growth momentum to continue, driven by its TMO segment, and especially its life science subsegment. Management maintained that the strategy is still to build up VMS’ engineering as well as research and development capabilities to create value for its customers.

At the same time, it will also continue to invest appropriately in new equipment when necessary to drive productivity. We believe such strategy of innovating and developing new products as well as improving existing products’ design alongside its customers will help improve its position to win market share steadily, compared to pure-play electronic manufacturing services (EMS) peers.

In our view, over the longer term, the strategy allows VMS to 1) sustain its margins through value creation, and also 2) to produce more products efficiently with lower headcount, resulting in sustainable growth. With a large portfolio of close to 200 customers across multiple industries, revenue growth will also likely be broad-based.

Attractive FY16F dividend yield of 6.0%

Given in-line 1Q16 results, we keep our forecasts unchanged. Together with a strong balance sheet (net cash position), consistent positive cash flow generating ability and diversified revenue base, we reiterate BUY with fair value estimate of S$9.00.

Source: OCBC Research - 29 Apr 2016