Venture Corp’s 3QFY2023 ended Sept 30 earnings came in lower than expected but with a more positive outlook and a lower share price, analysts from Maybank Securities and UOB KayHian have upgraded the stock from “hold” to “buy”.
On Nov 4, the blue-chip contract manufacturer reported earnings of $66.4 million in 3QFY2023. This was lower than the $70.2 million which Jarick Seet of Maybank had projected due to an 18.8% y-o-y drop in revenue to $2.29 billion in 9MFY20203.
However, Seet believes 3QFY2023 should be the bottom for Venture, whose management indicated that certain new products were introduced in 4QFY2023 with more slated in FY2024. “Customer inventory levels are also down sharply and we should see more orders placed in 4Q. With a brighter outlook, we think the worst is over,” Seet writes in his Nov 5 note.
Seet believes that Venture’s share price, which has dropped around 30% year to date, has “overcorrected”. The company, sitting on a growing cash pile of $956.65 million, currently offers a 6.2% yield — assuming it maintains its dividend payout of 75 cents per share. “Management has always emphasised sustainable dividends in good and bad times,” Seet notes.
With a slightly trimmed earnings forecast for FY2023 and FY2024, Seet has similarly cut his target price from $14.30 to $14, pegged to 14.5x FY2023 earnings.
Similarly, in their Nov 6 note, UOB KayHian analysts John Cheong and Heidi Mo point out that Venture’s 3QFY2023 results came in lower than they expected, although they continue to like Venture for its strong cash balance and “decent” yield of more than 6%. As the share price has dipped to a level they deem “compelling”, they have upgraded their call from “hold” to “buy”.
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Even so, they expect Venture to report 7% lower revenue for FY2023 through FY2025 due to near-term demand weakness and a more challenging macro environment.
As they dial back their FY2023 and FY2024 earnings forecast by 4% and 5% respectively, Cheong and Mo have cut their target price from $14.60 to $14.06, which is pegged to 14.6x FY2024 earnings, a valuation multiple that is in line with its long-term forward mean.
On the other hand, Ling Lee Keng of DBS Group Research, in her Nov 5 note, is maintaining her “buy” call but with a slightly trimmed target price of $15.10 from $15.40.
See also: Investors turn positive on Venture Corp on share buybacks and higher revenue guidance of customers
She warns that Venture is not immune to macroeconomic headwinds in the near-term even though longer-term growth strategies are in place. “Despite our optimism, there is a possibility that 4QFY2023 performance may still be muted,” says Ling.
Like Seet, Ling notes that Venture’s strong cash balance will support the dividend payout at 75 cents per share and a “strong war chest” should the company see inorganic growth.
Meanwhile, she expects earnings to drop 27% y-o-y in FY2023, followed by a recovery of 14% in the coming FY2024. Her new target price of $15.10 is pegged to 14x FY2024 earnings — a valuation multiple of –1 standard deviation (s.d.) from its four-year average. “With valuations below the previous trough level, we believe the upside risk outweighs the downside,” says Ling.
William Tng of CGS-CIMB Research, in his Nov 3 note, points out that his forecast of Venture’s 3QFY2023 earnings was “spot on”. He expects 3QFY2023 earnings to be the trough and that 4QFY2023 will see an improvement of 5.4% q-o-q as customers replenish depleted inventories.
Tng’s relatively bullish target price of $16.61, which he has maintained along with his “add” call, is based on the same 14.6x FY2025 earnings, a 15-year average.
According to Tng, potential re-rating catalysts will include new product launches by customers, further improvements in component availability and better-than-expected revenue opportunities over FY2024 to FY2025.
On the other hand, key downside risks include ongoing supply chain disruptions affecting the availability of parts and components, labour shortages potentially lowering its production output, and a worsening global economic outlook potentially further reducing orders from customers.
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Citi Research’s Jame Osman has similarly kept his “buy” call, but with a lower target price of $16.30 from $17.60 as he factors in lower earnings estimates.
“Despite near-term uncertainty, we believe Venture remains a structural beneficiary of supply chain de-risking and relocation trends favouring outsourced manufacturing into Southeast Asia manufacturing hubs such as Malaysia,” writes Osman in his Nov 6 note.
He also recognises that Venture has made headway to diversify its customer base into growth domains, which adds to his optimism that revenue trends have bottomed and a better FY2024 lies ahead.
Meanwhile, Paul Chew of PhillipCapital is more guarded, keeping his “neutral” call. Having cut his earnings estimates, his new target price has been reduced from $15.20 to just $12.50. “Venture’s valuation continued to de-rate as growth has stuttered over the past five years,” says Chew.
