Venture Corp's 1QFY2024 earnings came in softer than expected. However, with better clarity of an improving outlook, analysts are keeping their bullish views on this stock.
For the quarter to March 31, Venture's revenue dropped 18.9% y-o-y to $667 million, and earnings was down 18.3% y-o-y as demand remains soft.
Despite the lower top and bottom lines, Venture was able to hold on to its net margins at 9% for the quarter, versus 9.1% in the preceding 4QFY2023.
The company's already sizable net cash, meanwhile, continued to grow, reaching $1.19 billion as at end of the first quarter, or 29% of the market cap. In contrast, at the end of 4QFY2023, net cash then was $1.056 billion.
"With inventory destocking coming to an end, coupled with improving demand for most of the domains, the group expects a better 2HFY2024 vs 1HFY2024, and a stronger 2Q24 as compared to 1Q24," writes DBS Group Research's Lim Lee Keng in her May 6 report.
Citing customers' feedback, Venture, according to Ling, is starting to see demand strengthening in several technology domains for the rest of 2024.
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"This observation is in line with our view of a more significant recovery for the downstream players in second half of the year to end of 2024," says Ling, who has maintained her "buy" call.
Meantime, given the weaker-than-expected 1QFY2024 earnings, Ling has trimmed her FY2024 and FY2025 earnings forecast by 6.1% and 6.4% respectively, with lower margins assumptions.
This has led to a reduced target price of $16.40, from $16.90 previously, which is based on the same valuation multiple of 16x blended FY2024 and FY2025 earnings.
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In his May 5 note, Jarick Seet of Maybank Securities has kept his "buy" call and $15.80 target price, as he expects the company to enjoy a gradual recovery from FY2023 despite the weak start this year.
"With a yield of 5.3%, a strong balance sheet and an active share-buyback programme, we believe that Venture will likely be a safe haven for investors," he says.
In their May 6 note, UOB Kay Hian's John Cheong and Heidi Mo have similarly kept their "buy" call.
They note that Venture is growing with its customers and bringing on board new ones, including those in precision engineering.
Their target price of $16.37 is pegged to 0.5 sd above its long-term mean PE of 17x FY2024 earnings, "to capture the potential earnings recovery in 2024 and upcycle beyond that."
Citi Research analyst Luis Hilado, citing the management, notes that business headwinds have been tapering off and is confident of a q-o-q revenue pick up from 2Q onwards with positive demand from consumer lifestyle and data centre segments.
In addition, the company noted that its precision engineering group has seen orders picking up from 2Q and has started on-boarding new customers.
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"Management remains optimistic with 2H being stronger vs 1H revenue levels," says Hilado.
"While 1Q may have been soft, we believe this is widely expected and the company's signal of sequential revenue improvement should help support the share price. Downside risk is also likely mitigated with the company's ongoing share buyback programme," says Hilado, who has kept his "buy" call and $15.70 target price.
William Tng of CGS International shares broadly the same view as other analysts. Despite the lower-than-expected 1QFY2024 numbers, he is leaving this FY2024 forecast unchanged for now, as he expects the earnings to catch up in the subsequent quarters.
Tng is keeping his "add" call and $15.93 target price, based on 14.6x FY2025 earnings. He likes how Venture has earnings growth potential and is also well supported by its 5.28% dividend yield.
Tng sees potential re-rating catalysts from new product launches by customers and better-than-expected revenue opportunities over the coming two years from customers diversifying their production orders from China to Malaysia.
On the other hand, key downside risks include potential 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.
Alfie Yeo of RHB Bank Singapore, meanwhile, says that Venture's 1Q numbers were within his expectations. His current estimates has already taken into account a recovery only after the current 1HFY2024.
While he has kept his "neutral" call, Yeo has raised his target price slightly from $13.90 to $14.20 as he is tweaking his valuation multiple from 14 times FY2024 earnings to blended FY2024 and FY2025 earnings.
"We believe the stock is still pricing in its immediate term prospects despite earnings improvement in 2HFy2024. We look to a more pronounced earnings recovery before turning positive," says Yeo.
