Venture Corp’s FY2020 results show continuing recovery for the tech manufacturer, though figures are slightly below expectations, say analysts.
Analysts are split in their recommendations on the company, with RHB Group Research analyst Jarick Seet adopting the most pessimistic view, downgrading Venture Corp to “neutral” from “buy”, with a lower target price of $19.60 from $22.60.
“Valuation seems high at this point,” notes Seet in a March 1 note. “We downgrade Venture Corp due to weaker-than-expected earnings growth going forward.”
Last week, Venture Corporation Limited reported 8.1% lower earnings of $166.8 million for the 2HFY2020 ended December from earnings of $181.5 million a year ago.
The group’s FY2020 earnings stand at $297.3 million, 18.1% lower than FY2019 earnings of $363.1 million. The earnings translate to a net margin of 10.1% for the 2HFY2020 and 9.9% for the FY2020.
“4QFY2020 PATMI was $86.7 million with revenue rising 1.3% to $828.8 million. Advance payment segment was affected negatively but the medical technology & healthcare and life science & instrumentation segments grew strongly, which registered better margins, resulting in higher profit before tax (PBT) margin of 11.9%,” notes Seet.
Seet notes consistent recovery across the four quarters in terms of profitability in FY2020, a pattern likely to carry into FY2021 with improvement in revenue and profitability as the quarters pass.
Meanwhile, PhillipCapital head of research Paul Chew is maintaining “neutral” on the manufacturer, highlighting its pivoting to new growth drivers, including electric-vehicle (EV) batteries and wafer-fab equipment.
See: Venture Corp reports 8.1% lower 2H20 earnings of $166.8 mil, proposes final dividend of 50 cents per share
In a March 1 note, Chew raised his target price to $19.20 from $18.60, nudging FY2021F PATMI by up 3%.
“EVs are expected to experience explosive multi-year growth, especially in the Chinese market. Venture Corp intends to expand its manufacturing cluster in China. Equipment for gene sequencing is another exciting area undergoing massive innovation,” he adds.
Despite weaker revenue, Chew notes that the company managed to contain costs and expand PBT margins by 1.2% points to 11.9%. 2HFY2020 gross profit margins rose to 26.1% from 25.2% in 2HFY2019. This was aided by a higher mix of life-science products. Operating expenses such as staff and other expenses fell in line with the weaker revenue.
That said, revenue only improved a “modest” 1% q-o-q to $828 million, notes Chew. “Average improvement in the prior two quarters was 12%. We believe the drag came from weaker point-of-sale terminals. A sluggish retail environment due to the pandemic reduced the need for such terminals. On the other hand, demand for ventilators and diagnostic equipment rose.”
To Maybank Kim Eng Research analyst Lai Gene Lih, Venture Corp is still a “buy” with 2HFY2020 PATMI in line with its estimates and the “lower end of street” estimates. That said, the analyst has lowered Venture Corp’s target price to $22 from $23.27 on an unchanged 18.5 times FY2021 price-to-earnings ratio (P/E) at 1.5 standard deviation above four-year mean.
“Several end-markets were affected by Covid-19, particularly those facing retail end-markets (e.g. POS, consumer electronics), but this was offset by resilience in life-science, networking and communication and semi-con, which are beneficiaries in the pandemic. As the company’s value-add is higher in the life-science domain, net margin was flat y-o-y at 10.1% despite lower volumes,” notes Maybank’s Lai.
“Growth in the life science domain is expected to be driven by genomics-related products and advanced equipment for analysis/ diagnostics in biological systems. Covid-19 also presents opportunities to develop pandemic-related testing and diagnostic products.”
Lai has also trimmed his earnings per share (EPS) estimates on FY2021 and FY2022 by 4% to 5% to “fine-tune” margin assumptions.
Looking ahead, Lai sees Venture moving into “interesting domains”.
“Venture will widen its participation in robotics, automation and AI, and advanced semiconductor equipment domains. Venture is also optimistic in being able to capture value in adjacent domains, such as battery EVs, through its breadth of know-how across multiple domains,” he writes.
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Meanwhile, DBS Group Research analyst Ling Lee Keng notes that new products/services initiatives (NPI) in 2021 are expected to drive FY2021 earnings higher. That said, a number of these NPIs have been pushed back to FY2021 due to the demand and supply disruption in FY2020 as a result of the Covid-19 pandemic.
However, due to the chip shortages, some of the NPIs could see a slight delay, likely lasting till 2H2021.
In a March 1 note, Ling is maintaining "buy" on the company with a target price of $24.30.
"We continue to like Venture for its differentiating capabilities to attract key leaders in the respective domains that it has a presence in, and to offer end-to-end solutions from R&D right through product commercialisation. 'Buy' for steady recovery and quality earnings of a tech blue chip."
As at 9.19am on March 2, shares in Venture are trading 7 cents higher, or 0.36% up, at $19.37.
