• 3Q16 above our expectations
• Margins surprised on the upside
• Reiterate BUY on higher FV

Margins improvement continued into 3Q16

Venture Corporation Ltd’s (VMS) 3Q16 revenue grew 1.8% YoY to S$705.7m, mainly driven by the Test & Measurement/Medical & Life Science/Others (TMO) segment. 3Q16 operating expenses rose slightly by 0.7% YoY to S$650.1m, with declines registered across most expense items except for employee benefits expense (+8.2%). Consequently, 3Q16 profit before tax (PBT) and PATMI jumped 18.0% and 16.9% to S$56.7m and S$47.4m, respectively, despite a 23.6% increase in tax expense. PBT and net margins saw solid YoY improvement of 1.1ppt and 0.8ppt to 8.0% and 6.9%, respectively, as the strategy in pursuit of value creation for its customers continues to bear fruits.

For 9M16, VMS’ PATMI, which formed 76.4% of our FY16 forecasts, grew 16.0% YoY to S$126.6m on the back of a 2.9% increase in revenue to S$2.0b. We deem this set of results to be above our expectations as core PATMI in fourth quarter has historically (since FY12) been the strongest period compared to other three quarters.

Steady growth momentum to persist

Looking ahead, we expect VMS’ growth momentum to remain steady. We believe the improvement in margins seen over the past quarters is the result of VMS’ on-going focus on value creation strategy bearing fruits. In our view, with VMS expected to further strengthen its research and development (R&D) capabilities through recruitment of highly-qualified engineers to create value for existing and new customers, as well as its continuous efforts in lean manufacturing to improve productivity, we see more room for VMS to grow on higher margins. We also believe by building up its R&D and engineering capabilities, VMS will be better poised to forge stronger and more partnerships with customers to design/upgrade and manufacture new/existing products, in order to sustain the growth in its margins.

Raise FV to S$10.36

With solid set of 9M16 results, and expected improvement in margins ahead, we increase our FY16/17F PATMI by 2.8%/6.8%, respectively. As we roll-forward to 15x FY17F PER, we reiterate BUY on VMS, as our FV increases from S$9.35 to S$10.36.

Source: OCBC Research - 7 Nov 2016