SINGAPORE (Jan 10): Maybank Kim Eng says Venture Corp's estimated 39% revenue surge in FY17 is "no fluke" and that the Street may be underestimating forward revenue and margins.
Maybank expects Venture’s FY17 revenue to grow 39% y-o-y as analysis of the company's revenue and customers suggests it likely won significant allocations from a few existing customers.
As such, Maybank is initiating coverage of Venture with a "buy" and target price of $27.50. The house is valuing the company at 18.8 times FY18 earnings, a 10% premium over its global high-mix, low-volume peers, given its estimated 21% EPS CAGR for FY17-19 vs 12%.
"Our shortlist of probable customers includes Broadcom, Thermo Fisher and Honeywell. All have hefty margins and either large sales or materially higher sales since 2015," says analyst Lai Gene Lin in a Wednesday report.
For instance, consensus FY17 Cost of Goods Sold (COGS) for an enlarged Broadcom-Avago is US$9.1 billion ($12.2 billion), three times Avago’s pre-merger US$3.3 billion in FY15.
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Although Broadcom was not a customer prior to the merger, Broadcom opened a global warehouse in Batu Kawan, Penang, in 2017 to facilitate the export of export US$16 billion of products, nearly 80% of FY18 revenue.
It plans to invest US$1 billion over 10 years on its local supply chain.
As it is, Venture's manufacturing facilities are largely based in Malaysia and bought 30.6 acres of land in Batu Kawan in 2016.
In addition, Maybank believes Venture has also ramped up products with high R&D content, given that FY17 revenue growth was preceded by a pick-up in its R&D expenses in FY15.
Recently, Venture has been beefing up its capabilities in areas such as radio frequency (RF), optics and biology.
Its recent upgrade of net margin guidance to 6-10% from 6-8% signals that its business mix is tilting towards higher-margin products with more design and R&D content.
Channel checks suggest Venture may have won contracts for smokeless cigarette devices from a tobacco giant, and smart toothbrushes from a prominent high-end consumer-appliance company.
"If true, we estimate each to contribute 2-3ppt of FY18 revenue growth each," says Lai.
As at 12.02pm, shares in Venture are up 65 cents at $22.22.
