Recent Pullback Creates Entry Point; Upgrade to BUY

• We upgrade VENTURE CORPORATION LIMITED (SGX:V03) to BUY from HOLD on a price basis with unchanged earnings estimates and Target Price. The shares have fallen 18% since late-Apr amid a broad sector sell-off. See Venture Corp share price.
• Given the earnings volatility, we favour Venture Corp due to its more secure longer-term prospects from:
  1. resumption of growth from a broad base of >100 customers; and
  2. its ability to sustain ~10% net margin from increased value-add with customers.
• Our SGD19.74 Target Price is based on ROE-g/COE-g assuming 2.2x FY19E P/B (FY19-21E average ROE of 15% and LTG of 2%).

Scenario Analysis

• We assume a downside scenario of an 8%/17% cut in FY19E revenue/ core PATMI which leads to a ROE-g/COE-g fair value of SGD16.43 (1.9x FY19E P/B).
• Our scenario assumptions are:
  1. earnings volatility due to customers’ product transitions;
  2. delay in new product introductions (NPIs) in 2H19 across multiple customers;
  3. revenue decline from customers’ exposure to Huawei;
  4. demand weakness from a deterioration in global capex appetite; and
  5. pricing and cost pressures.
• We find this unlikely due to:
  1. y-o-y growth from new customers won in past years;
  2. margin sustainability from strong value-add with customers and astute cost management; and
  3. Venture Corp has not observed signs NPIs will be delayed.
• See sensitivity analysis of implied earnings expectation at various share prices in attached PDF report.

Long-term Growth Thesis Unchanged

• Once the earnings volatility passes, we expect a resumption of growth from:
  • wallet expansion with existing customers; and
  • contributions from new ones.
• Venture Corp has had a good track record of delivering on both. Venture Corp notes the US-China trade war has been a catalyst for customer wins. These could contribute more meaningfully in the next 1-2 years.

Better Clarity During 2Q19 Results

• Our DPS assumptions are unchanged in this scenario analysis as:
  1. Venture Corp has a track record of either maintaining or increasing dividends over the years; and
  2. we expect dividends to still be supported by strong FCF generation and balance sheet.

Source: Maybank Kim Eng Research - 10 Jun 2019