• Expect weak 2Q19; cut earnings forecasts by 6-8% for FY19F/FY20F.
• Test & Measurement, Medical & Devices and Life Science segments to drive growth.
• Still positive on Venture Corp despite weaker earnings for its premium quality; strong financials.
• Maintain BUY with lower Target Price of S$18.60.

Maintain BUY on Lower Target Price of S$18.60

• We have cut our earnings forecasts for Venture Corp (SGX:V03) by 6-8%, mainly premised on the cloudy outlook and product transition period for some of its customers. We expect a weaker 2Q19 both on a y-o-y and q-o-q basis, and a stronger 2H19 vs 1H19. Despite the cut in earnings, we are maintaining our BUY call.
• Venture Corp stands out for its strength in the various technology domains and its partnership with key industry leaders. Its above-average net margin is a key differentiating factor from its peers. The strong net cash should support expectations of a repeat of the higher 70-Sct DPS in FY19F, which works out to a yield of 4.7%.
• Venture Corp is one of the few blue chips that still offers an attractive yield in this yield-hungry environment. See Venture Corp's dividend history.

Where We Differ

• We remain positive on Venture Corp’s ability to monetise its unique offerings, know-how and hard-to-replicate ecosystems.

Potential Catalysts

• New products and continued expansion into non-traditional markets with higher margins, and new customers. Customer M&As and US-China trade developments, while a noise in the near-term, may give rise to new business opportunities ahead.

WHAT’S Weak 2Q19; Cut FY19F/FY20F

Earnings prolonged trade widening period

• We have our earnings for Venture Corp by 68% for FY19F/FY20F, and a weak, both on a y-o-y q-o-q basis. Our earnings is mainly on:
  • The trade, which leads muted for most Venture Corp’s key.
  • Widening during product period some its.

Dissecting for Venture Corp’s domain leading industry

• Venture Corp’s is linked its in various domain. Given group’s knowledge skillsets across diverse, Venture Corp is to and many technology leaders a wide-ranging. Its top 10 customers account for about 50-60% of revenue, a similar proportion seen in the last few years.

Test & Measurement, Medical & Devices and Life Science segments to drive growth

• The Test & Measurement, Medical & Life Science domain is expected to drive Venture Corp’s next growth phase. Venture Corp’s strategy in this space is to forge strategic partnerships with its customers to collaborate on the development of their new product offerings and replacement product launches. One example is the collaboration with a leading laboratory analytical instrument company, which is a long-term partner in the liquid chromatography domain. Leveraging on this long-term partnership, Venture Corp has expanded into manufacturing their next-generation mass spectrometry instruments. Going forward, Venture Corp can continue to leverage on its strong relationship with key customers to target opportunities in other new ecosystems.
• Overall, this cluster is still at the nascent stage of development. The global genomics market is projected to reach US$35.7bn by 2024 from US$18.9bn in 2019, at a CAGR of 13.5% during the forecast period, according to market research. Factors such as the rising government funding and growth in the number of genomics projects, decreasing sequencing costs, growing application areas of genomics, and the entry of new players and start-ups in the genomics field are driving the growth of the genomics market.
• Key players in the Test & Measurement, Medical & Devices and Life Science segments, including Agilent, Illumina, PerkinElmer and Thermo Fisher, are expected to do well. Agilent is guiding for single-digit growth in FY October 2019. In 2Q19, revenue for the Life Sciences and Applied Markets division was down 1% y-o-y while that for the Diagnostics and Genomics segment grew 5% y-o-y. Genome sequencing firm Illumina is still expected to register topline growth of 6%, albeit at a lower rate, vs its previous estimate of 13- 14%. Thermo Fisher and PerkinElmer, both in the analytical and life sciences space, expect forward earnings growth of 10-20% based on consensus estimate. Waters Corporation, an analytical instrument manufacturer, is forecast to deliver single-digit topline growth but its earnings are expected to ease slightly in the next 1-2 years. Philip Morris lowered its earnings forecast for 2019 but the IQOS segment did well. Sales rose 35% for IQOS in 1Q19 amid a 0.2% decline in cigarette sales.

Seasonally Weak 1H Vs 2H

Still Cut

• Despite the cut in earnings, we are maintaining our BUY call on Venture Corp for:
  1. Premium quality - Strong in R&D, entrenched position in a wide range of segments
  2. Strong financials - High margins, attractive yield, almost zero debt
  3. Decent valuations - PE below historical average
  4. Tailwinds stronger than headwinds on trade war impact

Premium quality

• Over the years, Venture Corp has transformed into a global player in a wide range of industries. Venture Corp stands out for its hard-to-replicate ecosystems and unique positioning at the forefront of technology. It has successfully steered its business towards more high value-added industries that require strong engineering capabilities, thus commanding an above-industry-average margin. Its partnerships with global technology leaders enable the group to gain new competencies to jump to the next phase of growth.

Strong Financials

High margins, R&D.

• Venture Corp’s net margin has surged to > 10% in the last two years, as the group steered its business towards more high value-added projects, vs the industry average of about 4-5%. For the last 16 years, Venture Corp’s share price has tracked 12-month forward EPS forecasts (correlation +0.80), which have largely been driven by changes in margins. In 2H18, its share price was affected by the downturn in the technology cycle on the back of global uncertainties. However, Venture Corp continued to register higher margins, driven by operational efficiencies and improved product mix.
• The group’s high margins are also partly due to its investment in R&D. R&D expenses per unit sales is also in an uptrend.
• Venture Corp has been pursuing innovation and technical competencies, building depth and density in engineering and research and development, as well as manufacturing operations and processes, to create distinct differentiators in its technology services, products and solutions.

Attractive DPS.

• Venture Corp has consistently been paying a DPS of at least 50 Scts per year in the last 10 years, which it increased to 60 Scts in FY17 and 70 Scts in FY18. Venture Corp’s net cash position has at least tripled since FY15 to S$805m as at end-1Q19, which should support expectations of a repeat of the higher 70-Sct DPS in FY19F. The stock’s current yield works out to an attractive 4.7%.

Near zero debt.

• Venture Corp has traditionally been in a net cash position, at least in the last 10 years. Its strong net cash of S$805m as at 1Q19 accounts for a healthy 18% of its current market cap.

Decent valuations.

• At current PE of 11.8x, Venture Corp is trading slightly below its long-term average PE of 13.7x.

Tailwinds Stronger Than Headwinds on Trade War Impact

Earnings & Recommendation

Maintain BUY; cut earnings by 6-8% and lowered Target Price to S$18.60.

• Our earnings cut is mainly premised on the prolonged trade war uncertainty and the widening of the product transition period for some of its customers. We expect pricing pressure to persist in FY19. Margins are hit and visibility remains low as customers are less willing to commit to orders in view of the cloudy outlook. Potential additional tariffs and the possibility of an all-out technology war between the US and China will have more detrimental impact. Though Huawei is now allowed to do business with US companies again in the latest development, uncertainty still prevails.
• The product transition impact is expected to be partly offset by new product launches. Similarly, contributions from new customers acquired are also expected to contribute to the group gradually. Thus, overall, we lowered FY19F and FY20F earnings forecasts by 8% and 6% respectively.
• On the back of the cut in earnings, our Target Price is reduced to S$18.60 (Previously S$21.70), pegged to its 10-year average PE of 13.7x on FY20F earnings. Maintain BUY.

Source: DBS Research - 12 Jul 2019