UOB Kay Hian is upgrading its call on Venture Corporation to “buy” with a higher target price of $23.76 from $17.64 previously, as its clients are seeing better growth prospects.
Although full-year earnings guidance from most of Venture’s clients remain withdrawn - citing high levels of uncertainty, consensus revenue forecasts show expectations of a strong recovery in 2021, to levels comparable or higher than 2019’s for key clients in the group’s Test & Measurement and Life Sciences/Medical domains, with expectations of a 7.9% and 18.8% growth respectively.
In an Oct 1 report, lead analyst John Cheong says, “We estimate these domains (including contribution from “I quit ordinary smoking” (IQOS) devices) form more than 50% of the group’s revenue. Other domains that we think Venture could see more traction include semiconductor-related equipment and networking & communications.”
Meanwhile, uncertainties in the business environment this year have caused several new product releases to be delayed to early next year.
Although Venture may or may not be involved, its key clients that have announced notable product launches in 2020 include: Illumina’s Next Seq 1000 that was originally scheduled for shipping in 4Q2020; and Agilent’s NovoCyte Penteon Flow Cytometer announced in September.
On the other hand, Venture could also benefit from rising demand for Covid-19 testing and diagnostic equipment from Thermo Fisher, which is expected to add US$1.6 billion in Covid-19 related revenue in 3QFY2020 (1HFY2020 group revenue: US$13 billion) and potentially meaningful revenue in FY2021.
“We believe demand for medical devices could gradually recover in 2H2020 and 2021 as medical procedures were deferred in 1H2020,” says Cheong.
The analyst believes that the stock should be trading at the top-end of peers’ valuations, given that it services clients that have dominant market share in their respective industries with long-term favourable dynamics (eg Illumina in the NextGen Sequencing market).
In comparison with many other ODM/OEM players, Venture’s business model focuses on a high-mix, low-volume product profile and it has a diversified customer base. This gives Venture net margins of 9-10%, the highest among most peers, even during a difficult operating environment such as in 1HFY2020 (9.6%) when revenue fell 25% on the back of an adverse impact from Covid-19.
As of end-1H2020, Venture recorded net cash of $834.1 million (forming 15% of its current market cap) and led the pack of US-listed peers which were mostly in net debt positions.
More importantly, Venture has consistently paid the same amount of dividends or better than that in the preceding year.
“We expect a dividend of 75 cents per share this year, which translates into an attractive dividend yield of 3.9%,” says Cheong.
As at 11.40am, shares in Venture are trading at $19.83, or 19.0 times FY2020 earnings with a dividend yield of 3.9%.
