SINGAPORE (Sept 30): Phillip Securities Research is initiating coverage of Venture Corporation with a “buy” and a target price of $17.68.
Venture is currently trading at 13x earnings. Phillip says this is attractive because, over the last 10 years, the stock typically trades at a PE range of 16x.
“Venture also boast a superior return on equity, profit margin and debt to equity ratio relative to its US listed peers,” says Phillip analyst Alvin Chia in a Monday report.
Venture provides technology services, products and solutions. The group’s revenue streams can be split into two main portfolios.
Portfolio 1 includes Life Science, Genomics, Medical Devices and Equipment, and Lifestyle Consumer Technology. Portfolio 2 includes Instrument, Networking & Communications, Security & Safety, Fintech, Advanced Payment Systems, and Printing & Imaging.
In FY18, Portfolio 1 contributed 43% of total sales or $1.5 trillion while the other 57% of total sales or $1.9 trillion came from Portfolio 2.
The more than 100 customers Venture serves globally include Patriot anti-missile system manufacturer Raytheon, computing giants HP and IBM, electronics companies Honeywell and Agilent, healthcare product manufacturers Medtronic and Thermo Fischer, and semiconductor manufacturer Broadcom.
“We think Philip Morris, Illumina and Keysight are likely to be Venture’s key customers,” says Chia.
Venture is one of the few manufacturers producing Philip Morris’ I-Quit-Original-Smoking (IQOS) product which faces less regulatory scrutiny than e-cigarette as it is a “heat” and not “burn” product.
On April 30, the Food and Drug Administration (FDA) approved the sales of IQOS 2.4 in the United States. The total number of iQOS users in the world has already hit nearly 11 million, according to Phillip.
Philip Morris has announced the launch of its new product, IQOS 3 Duo. This adds to PM’s IQOS family of products, says CGS-CIMB Research analyst William Tng in a Sept 26 report. Another possible product launch within 2H19 could be Philip Morris’ IQOS MESH product.
However, there has been a recent rash of mysterious vaping-linked illnesses in the US that have put healthy people in hospital with serious lung diseases. This led to some US states banning flavoured vaping products or banning all vapour-based e-cigarette sales, says Tng. Some countries, such as India, have also banned the sale of e-cigarettes (including IQOS).
Illumina is the manufacturer of products which are designed to accelerate and simplify genetic analysis. Over the last five years, Illumina has enjoyed revenue CAGR of 12.4% with FY20 revenues expected to hit about US$4 billion ($5.5 billion).
Keysight offers electronic measurement services using wireless, modular and software solutions. In FY18, Keysight achieved revenue growth of 21.6% y-o-y and FY20 sales in expected to hit more than US$4 billion.
Chia says design revenue accounted for more than 50% of Venture's total revenue, which is a “rare feat in the contract manufacturing space”.
Venture is also able to maintain a profit margin of 10.6% due to its extensive capability in R&D which results in value creation and customer stickiness, adds Chia.
Over the last 10 years, Venture’s spending on R&D has also been 1.72x higher compared to peers. In FY18, Venture’s R&D expenditure surged 66% to $83 million while peers spent an average of $23 million.
Chia believes this has allowed it to provide more value add to the customer, entrench the relationship and penetrate earlier into new projects.
As of 2H19, Venture has a net cash position of $760 million which is approximately 17% of its market cap.
“We forecast Venture to pay $202 million in dividends in FY19E, this equates to a pay-out ratio of 55% and a yield of 4.6% at current share price,” says Chia.
Among its peers, Venture has the largest (86%) proportion of its production facility in South-east Asia, namely in Malaysia.
This means Venture is likely to be a long-term beneficiary from the supply chain disruption in China due to the ongoing trade dispute with the United States, adds Chia.
Phillip's $17.68 target price is based on 14x earnings.
“Our valuation is conservative given Venture’s superior return on equity, profit margin and balance sheet. We expect Venture’s dividend yield to be stable at 4.6%,” says Chia.
CGS-CIMB Research has a “add” with a $16.28 target price.
“Our current base-case net profit forecast for 3Q19 is $90.4 million, down 11.9% on year,” says Tng.
Venture is due to report its 3Q19 results on Nov 8.
As at 4.21pm, shares in Venture are up 5 cent at $15.32.
