Cloudy Near-term Outlook; Downgrade to HOLD

• With limited upside to our revised Target Price after Venture's share price rally YTD, we downgrade VENTURE CORPORATION LIMITED (SGX:V03) to HOLD from BUY.
• Venture's management has warned of near-term ‘performance volatility’, which may be a negative share price catalyst. 1Q19 PATMI of SGD90.9m (+8.6% y-o-y) was slightly ahead of expectations at 24% of our/consensus full-year estimates (1Q typically accounts for 20-23%).
• We slightly raise FY19-21E EPS 2-3% to reflect the respectable set of results and our ROE-g/COE-g Target Price 3% to SGD19.74 on an unchanged 2.2x P/B.

Broad-based Revenue Growth

• Venture's 1Q19 revenue grew 8.5% y-o-y, driven by broad-based growth across multiple technology domains. Venture managed to deliver 2.5% q-o-q revenue growth, which we believe was attributed to the continuation of production ramp-up of new products offsetting seasonality effects.
• Net margin was flat y-o-y at 9.8%, despite pricing pressures. This was due to Venture’s productivity gains and strong cost control.

Signs of R&D Peaking

• Following a rising trend in 3Q16-2Q18, R&D expense appears to have peaked, judging by the sequential declines in 3Q18-1Q19. If this persists, FY21E revenue growth prospects may not appear rosy.
• Changes in R&D expense have typically led changes in revenue growth by 1-2 years.

Warns at Near-term Volatility

• Venture warns that near-term performance could be volatile as a result of customers’ product transitions into new generations, but highlights this will be mitigated by new product launches in 2H19. The volatility may result in a tough y-o-y earnings comparison in the next quarter, in our view.
• While 2H19 is expected to be seasonally stronger than 1H19, Venture has hinted that the traditional 45:55 revenue seasonality pattern in 1H:2H may be less pronounced this year. This is due to a mixed outlook from its broad base of > 100 customers as a result of protracted trade tensions and the global economic slowdown.
• We recommend investors await a more attractive entry point, and/or when it is becomes apparent earnings volatility has passed.

Revisions to Estimates 

• Following a respectable set of results that were ahead of our and consensus expectations, we slightly raise FY19-20E EPS 2-3%. While our confidence remains that Venture’s current level of profitability can be sustained over the longer-term, our FY19E net margin of 10% (-0.6ppt y-o-y) reflects management’s caution that the metric could fluctuate quarter to quarter.
• Our ROE-g/COE-g Target Price of SGD19.74 is based on unchanged 2.2x FY19E P/B, in turn based on FY19-21E ROE of 15.5%, COE of 8% and LTG of 2%.

Source: Maybank Kim Eng Research - 26 Apr 2019