Following Venture Corporation’s 3QFY2024 ended Sept results, Citi Research analyst Arthur Pineda has downgraded his call on the company from “buy” to “neutral” at a reduced target price of $14 from $15.70 previously.
On the other hand, the analysts at CGS International (CGSI) and Maybank Securities have kept their “hold” and “add” calls at respective lowered target prices of $14.34 and $12.60 from $15.95 and $14.20 previously. Meanwhile, DBS Group Research and RHB Bank Singapore have both kept their “buy” calls at respective lowered target prices of $15.10 and $15.40 from $16.40 and $16.46 previously.
Only PhillipCapital analyst Paul Chew kept his “neutral” call and target price of $13 unchanged.
In the period, Venture Corp’s net profit dipped 4.7% y-o-y to $60.6 million due to the 3.9% y-o-y lower revenue of $689.7 million.
“Operating momentum through 3QFY2024 had been disappointing with revenue and profit contracting q-o-q. Contrary to prior guidance, the back-ended recovery into 2HFY2024 appears to be fizzling with 2HFY2024 now guided to be flat versus 1HFY2024 given softer demand outlook from certain product lines,” writes Pineda in his Nov 10 report.
The company noted that revenue softness was induced by weak demand for the life sciences, lifestyle consumer, as well as test and measurement instrumentation tech domains.
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The analyst adds that while Venture Corp has been able to effectively control costs and thereby maintain profit margins at around 9%, profits contracted in-line with the revenue change.
“Management had indicated a potential pipeline of new products including high-growth areas such as data centre equipment and new advanced life sciences products. The street, however, is likely to overlook these as it first would need to see proof of financial delivery,” writes Pineda.
He also points to the company’s revision in guidance to flat h-o-h trends after previously optimistic indications on 2QFY2024 as his lack of confidence in the estimations.
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“While earnings momentum has disappointed, we believe the company has the munitions to maintain its dividend per share (DPS) at 5% to 6% given its $1.2 billion net cash balance position as of 9MFY2024, allowing it to weather cyclical challenges. In addition, the company remains supported by its ongoing share buyback program,” writes Pineda.
Alongside his downgrade on the company’s target price, the analyst had reduced his FY2024 to FY2026 revenue outlook by 10% to 11%, translating into a 15% to 17% reduction in net profit after tax (NPAT) forecast.
Pineda writes: “We believe the street will need to similarly mark down estimates. While momentum has disappointed, we note that the company remains well-placed to support the share price with yield and buy-backs.”
He notes that Venture Corp will be helped by new product introductions (NPIs) with existing customers and increased momentum from new ones, as well as a continued rise in contribution from medical products and life sciences, a cash-rich balance sheet, and a sustainable dividend.
“Near-term, we see earnings pressures owing to softer product sales while new products are under gestation,” writes Pineda.
Downside risks noted by him include a destruction of demand if Venture Corp’s customers undertake merger and acquisitions (M&A), labour shortages as a result of original equipment manufacturers (OEM) trying to find new supply chain alternative, an unexpected slowdown in economies that could hurt technology spending and finally, higher-than-expected impact of Covid-19.
Meanwhile, CGSI’s William Tng has reduced his FY2024 revenue forecast by 9.24%, leading to a 9.45% to 11.65% reduction in his FY2024 to FY2026 earnings per share (EPS) forecasts.
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“Despite this short-term reduction in revenue guidance, the company says that it remains on track with its strategy of pursuing revenue opportunities where it can co-participate via its own research and development (R&D) efforts and targets 8% to 10% pre-tax margin opportunities,” writes Tng.
He also notes that the company generated operating cash flow of $393.8 million in the 3QFY2024 and ended the quarter with net cash of $1.19 billion and zero debt.
Re-rating catalysts noted by Tng include new product launches by customers, and better-than-expected revenue opportunities over FY2024 to FY2026 as further business opportunities arise from companies keen to diversify their production orders from China to Malaysia.
Key downside risks include potential supply chain disruptions affecting the availability of parts and components.
Maybank’s Jarick Seet understands that Venture Corp’s NPI should strengthen demand in the longer term but short-term demand remains soft. “We revise down our FY2024/FY2025 NPAT forecasts by 5% and 4.9%.”
He writes: “We understand certain modules are patented and owned by Venture that could be sold to other customers with similar products. As a result, we believe the potential growth area for these segments can be exciting if the ramp-up is successful.”
Upside swing factors noted by Seet include a better-than-expected reception of high-growth products, while downsides include acquisitions of customers by competitors, excessive US dollar strength which could erode customers’ competitiveness and excessive US dollar weakness which could weaken Singapore dollar earnings. Holding more inventory at major hubs due to higher customer demand could also tie up working capital.
DBS’s Ling Lee Keng similarly sees near-term headwinds in the life sciences and test measurement instrumentation technology, projecting a flat 4QFY2024 performance compared to 3QFY2024.
“Trump’s presidency could potentially escalate trade restrictions and tariffs between the US and China, accelerating the adoption of a China+1 strategy. With its manufacturing facilities primarily located in Malaysia, Venture is well-positioned to capitalise on this growing trend,” writes Ling.
Alfie Yeo of RHB notes that as Venture’s 2HFY2024 is expected to be similar to the 1HFY2024, he lowers his FY2024 revenue by around 7% y-o-y.
“We do however forecast a recovery in FY2025 and have imputed a lower magnitude of earnings cuts for FY2025 and FY2026,” writes Yeo.
He adds: “We continue to like Venture for its strong net cash balance sheet, positioning for a FY2025 earnings recovery, consistent DPS payout, attractive dividend yield, share buyback initiative, and valuation below historical mean.”
Lastly, PhillipCapital’s Chew writes: “The annual free cash flow (FCF) of around $400 million is more than sufficient to cover the current dividends of $218 million.”
While his fellow analysts have been more negative, Chew sees a more stable near-term outlook.
He concludes: “The guidance of revenue for 2HFY2024 to be relatively stable compared to 1HFY2024 implies a flat y-o-y growth in revenue for 2HFY2024. Our estimate is for a 1% y-o-y growth in 2HFY2024.”
As at 11.56 am, shares in Venture Corp are trading 73 cents lower or 5.35% lower at $12.92.
