SINGAPORE (May 11): Following a 33.6% y-o-y drop in net profits for 1Q20 due to global supply chain disruption, most analysts have recommended that investors to “hold” shares in Venture Corporation despite the stock’s long-term growth prospects.
“Venture’s 1Q20 was affected by the lockdown measures due to COVID-19… Net margins fell to 9%, the weakest quarter in the last two years,” says DBS analyst Ling Lee Keng, who cut earnings forecasts for FY20 and FY21 by 12% and 7% respectively owing to the weaker quarter. “The disruptions to the global supply chain in China, Malaysia and Singapore, and factory lockdowns in China, Spain, the US and Malaysia, mainly impacted the second half of 1Q 2020.”
DBS Group Research and RHB have therefore downgraded Venture from “buy” to “hold” or “neutral”. RHB has lowered its target price to $15.10 from $16.60 with a 4% downside, while DBS has raised its target price from $15.80 to $15.90, albeit with a more modest 1% upside.
Still, the gradual relaxation of lockdown measures has seen analysts remain positive about Venture’s longer-term prospects.
CGS-CIMB research has maintained its “buy” call and $16.78 target price, believing that the present fall in profits is consistent with expectations following the Covid-19 shock and seasonal first quarter weakness. Maybank Kim Eng upgraded its pessimistic “sell” call to “hold” and raised its target price from $13.90 to $14.66 with a 2% downside.
“Venture is looking forward to the lifting of the lockdown of its global supply chain, as well as all of its operating entities in China, Malaysia, Singapore, Spain and the US. By end-April, almost all its operating entities received exemptions to operate without headcount or working hours constraints,” says CGS-CIMB’s William Tng. “Venture believes that some realignment of the global supply chain will be inevitable, and its entities in Singapore and Malaysia will be potential beneficiaries.”
Venture sees strengths in life science, medical and wellness, semiconductor-related equipment, networking and communications, diagnostic and research equipment and test & measurement sectors.
Maybank’s Gene Lih Lai estimates that these constitute 60-80% of the firm’s revenue. This is bolstered by already strong demand for ventilators and DNA molecule testing and monitoring equipment, including those used for next-gen sequencing and related supply chains.
As a result of its solid balance sheet, Venture’s financial position is strong and it is expected to sustain a 70 cent dividend with a yield of around 4%, which is consistent with typical dividend yields since 2018. The firm’s net cash position as of 1Q20 improved 19.5% y-o-y to $852.5 million, representing $2.94 per share or approximately 19% of its current market capitalisation.
“Management...expects a stronger 2H20, underpinned by traction with partners both existing and new,” say RHB’s Jarrick Seet and Lee Cai Ling, “This will be further bolstered by some new production introductions by existing partners across multiple selected technology domains such as life sciences, healthcare & wellness. It also expects to gain momentum with several new partners in life sciences & genomics, as well as healthcare & wellness – where contributions should grow post-2020.”
Venture’s management also believes that supply chains are very likely to be rerouted away from China in the aftermath of Covid-19 as firms seek to “ring-fence” supply chains and preempt potential trade conflict. With Venture’s operations concentrated in Singapore and Malaysia, it hopes to gain from trade diversion as firms look to offshore their operations to Southeast Asia.
In the longer-term, Venture will benefit from growing exposure to high-growth end-markets such as Test & Measurement, Medical & Devices and Life Science. The firm’s strong Research and Development capabilities and acquisition of a freehold side in Milipitas, Silicon Valley as well as an industrial building in Terbau, Johore, also bode well for its future growth.
Maybank Kim Eng notes, however, that customers from Venture’s POS and industrial end-markets appear to harbour a cautious-to-negative business outlook, potentially weakening demand in these sectors. Additionally, the counter’s global exposure and vulnerabilities to business cycles subject it to the risk of slower demand as a result of a global economic slowdown, as well as to geopolitical risks from trade tensions.
A weakening greenback against the Singapore dollar (SGD) and prolonged monetary expansion could also hurt Venture’s earnings. DBS’s sensitivity analysis shows that every 1% appreciation of USD against the SGD will increase Venture’s net profit by approximately 1.9%.
“Most customers have withdrawn guidance, underscoring their view that demand recovery hinges on Covid-19 being well contained, and activity returning as close as possible to pre-Covid-19 levels. On balance, we still favour the long-term prospects of most of VMS’ end-markets, but would prefer accumulating at better valuations to account for demand risks,” remarked Tng.
Analysts are nevertheless cautiously optimistic about Venture’s future.“We continue to believe that given Venture’s expertise and its entrenched relationship with industry leaders in the various technology domains, coupled with its balance sheet strength, Venture would emerge stronger from the current crisis and is well-positioned for longer-term growth,” predicts Ling.
As at 2.50pm, shares in Venture Corp are trading 5 cents lower, or 0.3% down, at $15.69.
