SINGAPORE (July 5): Venture Corp’s stellar 2017 was driven by I Quit Ordinary Smoking (IQOS) smokeless cigarette devices.
But with IQOS production slowing down and shifting away to its competitor, Venture’s earnings are at risk of declining in 2018 and beyond, say analysts.
In a Thursday report, UOB KayHian analysis affirms its initial belief that the IQOS device that Venture manufactures for Phillip Morris International (PMI) made up close to 25% of 2017 revenue on an accounting basis.
On a pure “value-add” basis, this shrinks to about 12% but gross profit contribution is significant at around 40%.
Production share of IQOS shifting away faster than expected. The combination of an unexpected slowdown of sales in Japan, the price war with Japan Tobacco, and competitor FLEX’s lower cost of production, has seen IQOS production share shift away from Venture faster than UOB has expected. Actual orders are also coming in lower than the original production outlook had suggested.
Apart from IQOS, the test & measurement/medical (T&M/Med) segment (ex-IQOS and Illumina) exhibited strong growth in 2017. While its key clients continue to report a positive growth outlook, Venture’s momentum might be slowing going into 2019. Revenue growth might also revert to historical averages.
Result transcripts of clients in the networking/communications and T&M/Med segments continue to report a mostly positive outlook for 2018. The growth appears strongest from T&M clients, as they either report accelerating order growth, or are raising their guidance for 2018. Headwinds are seen for Waters, while Illumina sees the rate of growth moderating. For networking/communication clients, growth is moderating (Broadcomm).
UOB is cutting earnings forecasts by 16-34% for 2018-20 as growth and margins normalise.
“Downgrade to hold, with a lower target price of $18.20,” says UOB, “Entry price: $14.00.”
As at 12.31pm, shares in Venture are trading at 33 cents lower at $17.17 or 14 times FY19F earnings.
