SINGAPORE (Oct 19): UOB Kay Hian is maintaining its “hold” call on Venture Corporation with a target price of $18.20.
This comes post the release of Philip Morris International’s (PMI) 3Q earnings statement last night, which reflected strong operating metrics but a more mixed outlook on device production split, in UOB’s view.
In a Friday report, analyst Foo Zhiwei says current levels may not represent a buying opportunity, as he remains cautious on Venture’s earnings outlook.
Despite the upcoming launch and production ramp-up of IQOS 3 and IQOS 3 Multi (the upcoming models of PMI’s I Quit Ordinary Smoking (IQOS) range of heat-not-burn tobacco products) Foo highlights the production targets of these products are likely to be more conservative until the inventory of their predecessor, IQOS 2.4+, depletes.
Although PMI expects the launch of its new design to revive device sales, Foo believes the release of the IQOS 3 Multi – which is being built exclusively by Venture’s competitor FLEX – poses a risk to Venture’s future production should demand wane for IQOS 3, which Venture has production rights to.
This is because the Multi design features an integrated battery & holder that is suggested by online media to allow for 10 consecutive smokes compared to the IQOS 3, which allows for only one smoke before a recharge is required in the accompanying battery pack.
“In order to chain smoke, a user [of the IQOS 3] will need two holders. As it stands, the ability to chain smoke while carrying only one device versus having to carry one battery charger and two holders makes the Multi a superior design. Furthermore, the form factor is similar to a standalone IQOS 3 Holder, coming in slightly longer at 120mm (IQOS 3 is ~92mm long). The only variance is price, of which we expect the Multi to be pricier,” explains Foo.
“As [the Multi] an exclusive design to FLEX, the worry here is that demand for IQOS 3 wanes and its design becomes obsolete, putting Venture’s future production at risk. This would result in Flex becoming the primary supplier, with Venture playing second fiddle, fitting perfectly into a scenario where PMI wants to pivot to a low cost, high volume supplier. Alternatively, PMI could choose to run a 2-tier device market that sees Venture producing the lower cost variant but as we have seen from Apple's attempts at the iPhone 5C that might not work out,” he adds.
With the Multi in play, the analyst thinks demand for Venture’s IQOS design could weaken, and that the group’s production outlook in 2019 may end up flat or lower than in 2018.
IQOS is estimated to make up 30-40% of Venture’s revenue, which means the group’s earnings have peaked in 2017/18 should Foo’s theory prove true. This means consensus earnings for 2019 face the risk of a downgrade.
“Production of the next generation device has already started, so we expect some contributions from it in 4Q18. Note that production is not maxed out in 2018, contrary to PMI's remarks about ramping up production. With device growth in key market Japan likely to slow, much depends on the growth in Europe,” concludes the analyst.
As at 5.16pm, shares in Venture are trading 1 cent higher at $16.27.
