Venture’s stock price has retraced 29% from its peak, driven by slower-than-expected uptake in Philip Morris International (PMI)’s Reduced Risk Products (RRP)/investors’ fear of “concentration risk” crimping Venture’s 2018 growth. However, studying PMI’s past results gives us better sense of the degree of concentration risk. Our calculation indicate that given the 3.3m iQos devices PMI sold in 2017 (plus assuming COGS prices between 40-60% of retail prices) translates to revenue contribution no more than 6% of Venture’s 2017 revenue. Doubling these units for channel inventory still gives revenue concentration near to 12%, far from the fearful 30% cited by investors. PMI had published that it was “supply-constrained” 2017 and planned a second supplier by early 2018 – i.e. these were planned transitions.
Reiterating Venture's diversified customer base
This calculation implies much less “concentration” risk than that feared. We believe Venture has a diversified customer base with more than 100 active customers, with only 1 customer above 10% (which has been the case since 2013), with its top 10 customers accounting for ~50% of group revenue. Historically, Venture has leaned on margins/reduced asset intensity/capex investments to drive profitability (rather than growing revenue).
1Q18 results: Strong margins drove profitability, NPAT growth 72% YoY
NPAT margins 9.8% (1Q17: 5.8%) Neutralising impact from FX, we est. NPAT margins would hit double digits. 1Q18 cash conversion cycle was higher at 102 days (the last time it was at this level was in 3Q16). At the results briefing, this was alluded to higher inventory/raw materials in support of customer ramps in 2Q/3Q.
Venture continues to execute towards being a higher growth firm, with life science and industrial clients (that continue to exhibit growth across 2018). Venture's continued growth coupled with its cash generative business model continues to like the stock. PER valuations now 9% discount to Singapore’s market average but with earnings growth at least twice better. Ex-div date May 17th.
Citigroup maintains BUY with TP S$31.74 unchanged.
Source : Citi Research