Venture Corp's 3Q20 Within Expectations; Upgrade to BUY

• Venture Corp (SGX:V03)'s 3Q20 PATMI of S$80.2m (-5.9% y-o-y, +14% q-o-q) was within our expectation but marginally below street’s.
• Several end-markets are recovering well, and Venture Corp and customers’ are optimistic towards new products and pipeline. Such signs typically lead to an earnings upgrade cycle. As such we upgrade Venture Corp to BUY, now on 18.5x FY21E P/E, from 2x FY21E P/B previously.

Continued Sequential Recovery in 3Q20

• Venture Corp's 3Q20 revenue rose 18.2% q-o-q to S$818.4m (-5.8% y-o-y), underpinned by strong demand from customers in the life science & genomics, medical devices & equipment, healthcare & wellness, networking & communications and semiconductor equipment domains.
• Demand for essential products, such as ventilators and qPCR/dPCR equipment remains strong.
• Net margin was resilient at 9.8% (flat y-o-y, -0.3ppt q-o-q).

Stars Aligning for a New Earnings Upgrade Upcycle

Venture Corp - Valuation and Risks

• We now value Venture Corp using forward P/E from ROE-g/COE-g derived P/B. This is primarily to capture unquantifiable ROE upside, which is typical during the early parts of Venture Corp’s earnings upgrade cycles.
• Our Target Price is based on 18.5x FY21E P/E, or +1.5 SD above 4-year mean, where Venture Corp spent much of its time trading at during the 2H17-1H18 earnings upgrade cycle.
• Key risks to our view include
  1. slower than expected recovery in end markets;
  2. large customers’ M&As disrupting Venture Corp’s sales to these customers;
  3. unexpectedly strong recovery in industries worse affected by COVID-19 than Venture Corp, thereby causing Venture Corp’s valuations to mean revert.

Source: Maybank Kim Eng Research - 8 Nov 2020