RHB Bank Singapore analyst Alfie Yeo has downgraded his call on Venture Corporation V03 to “neutral” from “buy” previously after a “disappointing” set of earnings for the 1HFY2023 ended June. Yeo has also lowered his target price to $14.40 from $18.26.
On Aug 4, Venture reported earnings of $140.0 million for the six-month period, 19.7% lower y-o-y., from weak demand and lower operating margin. Revenue for the same period fell 11.9% y-o-y to $1.58 billion due to a high base in the 1HFY2022.
“Although valuation is compelling, at -1 standard deviation (s.d.) of its historical mean, visibility of customer demand and earnings outlook remain weak,” Yeo writes.
“Given the soft outlook, we now peg our target price to 14x blended FY2023 – FY2024 from 16x. Along with the earnings cut, our target price is reduced by a further 21%,” he adds.
On the back of the lower-than-expected earnings, Yeo has also reduced his earnings estimates for the FY2023 - FY2025 by another 9% - 11% to 3% - 5% from 5% previously. His revenue assumptions for the FY2024 - FY2025 has been lowered by 9% - 10% although his margin estimates remain unchanged.
“Venture continued to miss our 1HFY2023 estimates despite our earlier earnings cut, with the key driver being weak customer demand. 2HFY2022 benefitted from strong customer pent up demand which eased in 1HFY2023 as companies destocked their inventories,” says Yeo.
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In addition, he does not see 2HFY2023 to be “exciting” as companies continue to destock, thereby further dampening Venture’s revenue.
“Our FY2024 earnings are only 3% if customer demand recovers, but FY2024 would have further downside risks if demand does not,” he points out.
“Growth drivers would stem from new customer wins from de-risking its manufacturing base from higher risk Asian countries into South-East Asia; technological demand for products in new segments such as the life sciences and electric vehicle (EV) market; improving value capture and margins via strong engineering and design capabilities; new product introduction,” he adds.
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Despite the soft near-term outlook, Yeo notes that Venture’s balance sheet remains at a robust net cash position of $3.08 per share.
As the company declares dividends based on a sustainable dividend per share (DPS) of 75 cents for the past three years, the analyst believes it is “well supported by its balance sheet and has minimal downside”.
Upside risks include a stronger and, or earlier-than-expected global recovery and accelerating global demand while the converse, naturally, poses downside risks.
As at 3.03pm, shares in Venture are trading 15 cents lower or 1.06% down at $14.05.
