SI Research: Venture Corporation – A Buy On Solid Earnings?

The share price of global electronics services provider Venture Corporation (Venture) was battered in 2018 as investors were cautious about the impact of the ongoing US-China trade war. After closing 2018 at $13.95, shares of Venture have risen to $17.45 to register a year-to-date return of 25.1 percent as at 25 March 2019 on the back of a possible trade war solution. On the other hand, the Straits Times Index only recorded a rise of 3.7 percent during the same period.

Amidst this backdrop, Venture reported a solid FY18 that exceeded street estimates and has been receiving rather positive recommendations from the street. Is it time to buy into Venture?

Solid Full Year Earnings

	FY18	FY17	FY16	FY15	FY14
Revenue ($’m)	3484.6	4004.5	2874.2	2656.5	2465.5
R&D ($’m)	83.0	49.9	36.9	42.5	31.0
Net Profit ($’m)	370.1	372.8	180.7	154.0	76.0
Net Margin	10.6%	9.3%	6.3%	5.8%	3.1%

In FY18, revenue slid 13 percent to $3.5 billion attributed to the impact arising from client’s product transitions and M&A activities. However, Venture executed well in improving cost efficiencies with cost of materials used in production falling 16.7% to $2.5 billion and employee costs also declining 8.3% to $317.4 million. Bottom line was further propped up by $9.2 million in investment revenue and $1.7 million in exchange gain.

Despite headwinds against the group’s top-line performance, net profit dipped only by a marginal 0.7 percent to $370.1 million against a high base in FY17 that included one-off gain of $11.3 million on the disposal of its stake in Fischer Tech. Excluding the one-off gain, net profit would have risen 2.4 percent.

Meanwhile, Venture spent a total of $83 million in research and development (R&D) in FY18, which was the highest in Venture’s history. Notwithstanding the higher R&D expenses, net profit margin for FY18 increased by 1.3 percentage points to 10.6 percent. In addition, 4Q18 net margin stood at 11.9 percent, marking the sixth consecutive quarter of more than nine percent net margin since FY17.

We believe the previous R&D expenses went into improving productivity and reducing material costs to boost up the net margin. We view that the high R&D spending could further enhance profitability over the long run. We also believe the positive performance is likely due to maiden contribution from new customers and new product introductions in 4Q18. Moving forward, Venture’s next phase of growth will mainly be driven by new product launches and expansions into new markets that leverage on its success in value creation within its Clusters of Excellence.

Strong Balance Sheet and More Dividend

As at 31 December 2018, Venture’s cash and bank balances stood at $712.8 million against bank loans of a mere $1.8 million. This translates to a strong net cash position of $711 million.

Adding to this, management proposed a final dividend of $0.50 per share for FY18. Including the first-ever interim dividend of $0.20 per share paid in September 2018, the total dividend payout for FY18 will be $0.70 per share, 16.7 percent more than the $0.60 declared for FY17. Also, this marked the second consecutive year of dividend growth as Venture has been distributing a stable dividend of $0.50 per share each year prior to FY17.

At the closing price of $17.45, this translates to a decent dividend yield of four percent making it one of the established blue chips on the Singapore Exchange offering a reasonable and stable dividend income. Judging by the consistent dividend record and strong cash position despite a higher dividend payout in FY18, we could expect FY19 dividends to be likely the same or higher.

Valuations

	Closing Price ($)	EPS ($)	P/E Ratio	P/E ex-cash	NAV ($)	P/B Ratio	Dividend ($)	Dividend Yield (%)
FY18 (25 March 2019)	17.45	1.29	13.57	11.65	8.16	2.14	0.70	4.01
FY17 (23 March 2018)	27.63	1.31	21.09	19.16	7.61	3.63	0.60	2.17

At $17.45 per share, Venture is currently trading at 13.6 times earnings and 2.1 times to book value. However, stripping away net cash from its share price, price-earnings ratio (P/E) ex-cash would be only at 11.7 times, lower than 19.2 times a year ago. Comparatively, we observe that the current valuation appears to be undemanding.

In FY19F, the launch momentum is set to continue as Venture will be benefiting from the ramp-up of new products launched in 4Q18. Meanwhile, Venture has garnered interest from clients who are interested to relocate production to Southeast Asia. This provides new business opportunities to Venture on the back of trade diversions. Besides that, Venture has recently acquired a factory in Tebrau, Johor for RM6 million as well as extending the lease for a further 30 years to 31 March 2054 for RM6.2 million, which further suggests optimism over near-term growth prospects.

Going forward, Venture will focus on enhancing its globally linked Clusters of Excellence by leveraging on its new facilities in Milpitas, California to develop several dynamic ecosystems to serve new markets in selected technology domains.