SINGAPORE (Oct 2): UOB Kay Hian is maintaining its “hold” call on Venture Corporation with a recommended entry price of $16 and target price of $18.20, which is pegged to 14 times 2018F P/E.
The research house’s rating reiteration follows Philip Morris International’s (PMI) Investor Day 2018 last week, which revealed a pickup in sales of IQOS (I quit ordinary smoking) smoke-free electronic devices with approximately 1.8 million IQOS units sold in 2Q18 and 1.7 million units sold in the first two months of the subsequent quarter.
“Recall in Jun 18, PMI had slashed prices for its IQOS kits by 30% to 7,980 yen/unit, which could have helped sales,” says analyst Foo Zhi Wei in a Tuesday report.
While Foo notes a decline in share of market (SoM) in Japan, he believes the slowdown could have been offset by a slight sales increase in South Korea as well as a pick-up in European countries Italy, Greece and Russia, which saw their SoM grow by 0.4-3.1 percentage points versus 1Q18 figures.
Another key takeaway from PMI’s investor figures is a shift in the company’s net revenue growth guidance which has shifted lower to about 3% from 3-4% previously.
Foo notes that IQOS devices have been guided to account for 20% of revenue replacement program (RRP) revenue, which he considers low as historical figures have trended at 22-25% of RRP net revenues in 2016-2017.
Nonetheless, the analyst believes the 3Q18 pick-up in IQOS sales volume points to an encouraging 2019 for Venture Corp, the manufacturer, as it could spur replacement demand and translate to higher next-generation IQOS device production volumes – namely IQOS 3 and IQOS 3 Multi – in the following year.
He estimates that greater clarity on this is likely to emerge closer to end-2018.
“Taking an assumption for inventory allowance, it is highly likely that average monthly production [of IQOS devices] in 2017 was well over 1 million units/month. Venture was the sole producer in 2017; FLEX’s [Venture Corp’s competitor] inventories only reached market in 1Q18 based on our channel checks,” observes Foo.
“Upside risk could stem from a higher-than-expected production schedule for IQOS 3 in 2019, which will significantly lift [Venture Corp’s] earnings,” he adds.
As at 10:17am, share in Venture Corp are trading 14 cents lower at $18.38 or 2.18 times FY18F book value.
