Rising Earnings Momentum in 4Q18 Q-o-q; Target Price +10%

• VENTURE CORPORATION LIMITED (SGX:V03)'s FY18 PATMI was 7% above our estimate but in line with the street.
• 4Q18 core PATMI fell 18% y-o-y due to customers’ product transitions as well as M&A but was 33% higher q-o-q on new product introductions (NPI).
• We raise ROE-g/COE-g Target Price by 10% to SGD19.23 reflecting our confidence that Venture Corp’s higher level of net margins will be sustained longer term. Our Target Price is now based on 2.2x FY19E P/B from 2x previously.
• Stronger-than-expected recovery is a catalyst. Reiterate BUY.

Sequential Recovery May Have Legs

• Venture Corp’s 4Q18 revenue/PATMI increased 18%/33% q-o-q on the back of NPIs. The sequential recovery may carry on for another 1-2 quarters. Indicators are:
  1. full quarter contributions in 1Q19 for products launched at various points in 4Q18;
  2. NPIs in 1Q19; and
  3. elevated inventory levels above SGD800m (FY18 range: SGD700-800m), which largely comprise raw materials.
• We understand Venture Corp only buys raw materials after receiving purchase orders from customers.

Another Quarter of Strong Margins

• Venture Corp’s 4Q18 net margin of 11.9% (-0.2ppt y-o-y, +1.4ppt q-o-q) was the sixth consecutive quarter of > 9% net margins, attributable to strong value-add, judicious cost management and lower effective tax rate. While management believes this new level of profitability is sustainable, it emphasized some fluctuations should be expected.
• Venture Corp reiterated that the ultimate strategy is to expand revenue alongside margins.

Outlook

• Venture Corp expects revenue growth in 2019 will be driven by NPIs.
• Due to an uncertain macro outlook, we remain conservative with our earnings forecasts. Venture Corp may outperform our estimates if the take-up rate of new products is stronger than we expect. Due to increased involvement with customers, new products may command better margins.
• To drive future growth, Venture Corp is keen on developing ecosystems at its Milpitas facilities in California, as well as pursuing M&A to deepen technological capabilities.

Revisions to Estimates

• Following a decent set of results that were ahead of our expectations, we raise FY19-20E EPS by 6-7%. This reflects our increased confidence that Venture Corp’s higher level of profitability can be sustained. We believe our FY19-21E net margin assumptions of 10.1%-10.5%, which are below FY18’s 10.6%, factor in management’s caution that net margin may fluctuate from quarter to quarter.
• Our ROE-g/COE-g Target Price of SGD19.23 is based on 2.2x FY19E P/B, in turn based on FY19-21E ROE of 15.2%, COE of 8% and LTG of 2%.

Additional Takeaways

Increased dividend:

• Venture Corp announced a final DPS of SGD0.50, bringing the full-year DPS to SGD0.70 (+17% y-o-y). This is the second consecutive year of dividend increases, and represents a pay-out ratio of 54%.
• Management hinted this level of pay-out ratio is a sustainable reference for future dividends.

Capex and M&A:

• Venture Corp also announced the acquisition of a factory in Tebrau, Johor for MYR6m. Venture Corp will also extend the lease by 30 years to 31 March 2054 for MYR6.2m. While the land size is approximately 16,046 sqm, the built-up area of the property was not disclosed.
• Venture Corp has also announced its intention for additional M&A to deepen its technological capabilities to pursue opportunities in attractive technological domains. Management reiterated multi-year plans to develop dynamic ecosystems at its Milpitas facilities in California. It believes this will enhance partnerships with customers, which will in turn translate to quality growth in the future.

Source: Maybank Kim Eng Research - 25 Feb 2019