■ Rolling over to CY17 EPS at unchanged 6-year average P/E of 14x sees target price rising 9.5% to S$9.37.
■ Outlook remains stable though customers are not guiding for high volume growth.
■ Risk of customer consolidation remains but the worst impact of any such consolidation is over for Venture.
■ Limited capex needs, strong cash flow generation supportive of continuation of S$0.50 DPS trend.
■ Higher effective tax rate of 13-15% here to stay. Tax concessions being granted on selected activities only.
We held a lunch NDR for Venture Corporation.
Questions focused on:
1) the current outlook for its business;
2) customer concentration and outlook;
3) impact of customer M&As;
4) pricing pressure;
5) capex needs;
6) dividend policy;
7) exchange rate impact, and
8) effective tax rate trend.
Less than 15% of Venture’s manufacturing content is derived from Singapore. As such, Singapore’s NODX has long not been an effective leading indicator of its performance. About 60% of Venture’s shipments are to the US, 25-30% to Europe, and the balance to Asia-Pacific. Based on customer feedback, Venture’s take is that the global economy is generally benign, though Europe could still be a concern.
Generally, Venture’s top 10 customers accounted for about 50% of its sales. Areas with growth potential include Life Sciences and 3D Printing. Venture has seen growth from new customers as well as higher unit shipments to existing customers. Pricing pressure is a given in the industry and Venture addresses this by focusing on niche and less price sensitive products where it can offer value-add and justify its pricing. At the same time, effective cost management and productivity is ingrained into its corporate culture.
Industry consolidation does not offer better supplier power
Venture opines that industry consolidation in the EMS industry has halted as history has shown that the M&As involving top EMS players in the past has not resulted in better supplier bargaining power. As the EMS company does not have brand ownership and remains a manufacturing supplier, the balance of power does not shift to the EMS company. A fragmented share ownership may expose the company to some M&A risk while its strong cash flow generation capacity could attract private equity players.
Our valuation basis remains 14x earnings, its 6-year avg. P/E multiple. Rolling over to our unchanged CY17 EPS forecasts, our target price rises by 9.5% to S$9.37. Venture has guided for an effective tax rate of 13-15% vs our 14% assumption for FY15-17. Although there is no formal dividend policy, strong cash flow generation and limited capex needs are supportive of a S$0.50 DPS. A stronger US$ and weak MYR continue to be tailwinds for Venture. Maintain Add. (Read Report)
Source : CIMB Research