• In-line 2Q18 results
• Limited impact from trade tensions
• Firm margins expected

Good Set of Results

Venture Corporation Ltd (VMS) delivered a good set of 2Q18 results. Revenue for the quarter fell 6.0% YoY to S$952.3m, though we understand that growth would have been flat in US$ terms. PBT grew 36.3% YoY to S$115.2m, which management attributed to operational excellence across the group, continued R&D, and achievement of lower costs at various operating levels.

PATMI grew 40.2% YoY to S$97.9m; accounting for one-offs, we estimate that core PATMI grew 35.9% YoY to S$95.3m, forming 23.0% of our full-year estimate. We deem this to be within expectations, given that 2Q typically forms ~22.6% of the group’s full-year core PATMI.

In terms of margins, the 2Q core PATMI margin of 10.0% compares favourably to the 6.9% and 9.8% registered in 2Q17 and 1Q18, respectively. The group also declared its inaugural interim dividend (20 S-cents per share) since listing.

Dispelling the Concerns

While the group’s inventory level has been growing (S$727.2m in 2Q18), we attribute this to management’s proactive decision to carry more critical components in light of tighter component supply conditions, following consultations with various customers.

On the impact of trade-war tensions, management shared that not only is less than 2% of the group’s revenue affected by the HS code tariffs to the U.S., the group has also thus far been able to work out certain strategies with partners to mitigate this exposure.

Furthermore, the current tensions have also led to increased business from both new and existing customers; a number of them have plants in China, but wish to leverage VMS’s production facilities in Malaysia and Singapore.

Firm Margins Expected

Moving forward, we remain confident of the group’s ability to deliver net profit margins of 9- 10%. The group’s growing R&D expenses typically translate into firmer margins, while the group’s tight customer collaboration should help to create longer term value.

With a change of covering analyst, we switch from a DCF-based valuation to a target P/E one. We ascribe a 15x multiple (0.5 S.D. above the 5-year forward mean), thus lowering our FV from S$30.00 to S$23.23.

We believe such a multiple is reasonable as compared to peers such as Hon Hai and Flextronics, who trade at implicit consensus target P/E of ~12.5x, yet command much lower forecasted net margins of 2.4% - 2.8%

Source: OCBC Research - 6 Aug 2018