Analysts are mixed on Venture Corporation V03 as near term weakness in the electronics manufacturing industry looms large.
DBS Group Research and UOB Kay Hian Research have both downgraded their ratings for Venture to “hold”, with lower target prices of $18.10 and $16.99 from $20.10 and $20.20 previously.
PhillipCapital Research has also downgraded their rating to “neutral” from “accumulate” with a lower target price of $17.10 from $19.70 previously, citing little visibility of a recovery.
Maybank Research has maintained its “hold” call with a decreased target price of $16.50 from $17.32 previously.
However, RHB Group Research has maintained its “buy” recommendation for Venture on the “imminent global recovery”, but still with a lower target price of $19.36 from $22.00 previously.
According to DBS analyst Ling Lee Keng, while Venture’s differentiating technology capabilities do set the company apart from its peers, it is “not immune” to the macro-economic slowdown in the near term that has affected demand.
She notes, however, that Venture could be “less affected” than industry peers given its exposure to higher end consumer products where demand is less volatile.
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For the company’s 1QFY2023 ended March, performance came in below her expectations on this continued demand weakness. For the period, Venture’s revenue of $821.7 million was down 7.6% y-o-y, while its net profit of $73.6 million was 12.4% lower y-o-y as net margins eased to 9.0% from 9.5%, due to inflationary pressure and the lower revenue recorded.
Venture’s effective tax rate remained at 18%, similar to 1QFY2022.
For the first quarter of FY2023, revenue and net profit accounted for 21% and 20% of her full-year forecasts, compared to 23% for both revenue and net profit in 1QFY2022, below expectations.
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Accounting for the near-term weakness, Ling has lowered her FY2023 and FY2024 earnings by 10% to 12% to account.
The analyst has downgraded her call to “hold” with a lower target price of $18.10, still pegged to a five-year average price to earnings ratio (P/E) of 15x on blended FY2023 and FY2024 earnings.
Venture’s 1QFY2023 earnings also missed UOB Kay Hian analysts John Cheong and Heidi Mo’s expectations by some 15%.
“Based on Venture’s customers’ outlook, near-term demand weakness is expected. Venture also highlighted that in the short term, the global macroeconomic and geopolitical environments remain uncertain,” they write.
Cheong and Mo have cut their FY2023, FY2024 and FY2025 revenue estimates by 12%, 14% and 17% to account for the near-term demand weakness of Venture’s customers and the more challenging macro environment.
Due to lower operating leverage as a result of weaker revenue, their net margin estimates have also fallen by 0.3 to 0.4 percentage points to 9.1%, 9.2% and 9.2%. Consequently, their FY2023, FY2024 and FY2025 earnings estimates are down by 16%, 17% and 20%.
The UOB Kay Hian analysts have downgraded their call to “hold” with a 16% lower target price of $16.99, pegged to Venture’s long-term forward mean P/E of 15.5x FY2023 earnings.
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Maybank analyst Jarick Seet says Venture’s underperformance for 1QFY2023 “justifies” his April downgrade of the company to “hold”.
Citing a darkening global economic outlook which will result in what the company’s own management had called a “challenging year”, Seet downgraded his rating for Venture to “hold” from “buy” on April 25, lowering his target price to $17.32 from $20.20 prior.
He has since further cut his net profit after tax (NPAT) forecasts for FY2023 and FY2024 by 4.2% based on a 15x FY2023 P/E, which has cut his target price further to $16.50.
Meanwhile, analyst Paul Chew of PhillipCapital has cut his FY2023 patmi by 13% to $311 million as he has lowered his revenue forecast by 12%. He has lowered his target price to $17.10 on a 16x FY2023 P/E.
“After enjoying revenue growth for the past five consecutive quarters, 1QFY2023 fell by 7.6% y-oy. Our initial expectation was a modest 5% improvement in revenue for FY2023. However, the slowdown in the macro environment is causing revenue to fall sharper than expected. Venture is still finding difficulty crossing the record revenue of $4 billion achieved in FY2017,” says Chew.
Aside from Chew and despite their near-term concerns the analysts from DBS, UOB Kay Hian and Maybank are unanimous in their positive outlook on Venture’s longer-term prospects and the company’s ability to provide “consistent dividends”.
Ling of DBS points out that Venture has long-term growth strategies in place, and will continue to invest in new differentiating capabilities in multiple technology domains to pave the way for future growth.
The company’s key areas of focus include domains with structural long term growth potential such as life sciences, medical and healthcare, she adds.
Ling believes Venture’s strong cash position of $920 million as at March 31 with no debt will support dividends and drive its next phase of growth.
The strong net cash position supports at least a repeat of the 75 cents dividends per share (DPS) for FY2023, which works out to an attractive yield of some 4%, she says, adding that a strong war chest also enables the group to capture new opportunities for its next growth phase.
“In the longer term, we remain positive on Venture’s ability to monetise its unique offerings and differentiating capabilities when the global economies recover,” says Ling.
The UOB Kay Hian analysts add that Venture’s net cash position places it ahead of its US-listed peers, which were mostly in net debt positions as at end-March. They note that Venture continues to issue the same amount as or better than dividends of preceding years, and currently offers a “decent” dividend yield of around 4.4%.
“In the longer term, Venture remains focused on its mission to become a leading global provider of technology services, products and solutions. It will continue to invest in enhancing its capabilities to be futureready to deliver sustainable, impactful value for all stakeholders,” they write.
According to Cheong and Mo, the company’s ongoing efforts to mitigate supply chain constraints are expected to further optimise its inventory levels and working capital.
In 1QFY2023, trade receivables fell by $101 million from 4QFY2022 to $804 million as active collections resulted in lower trade receivables. “On the other hand, Venture continues to proactively manage its inventories, which improved $48 million q-o-q and $136 million y-o-y to $1,017 million,” they add.
While Maybank’s Seet still prefers competitor Aztech Global, he acknowledges Venture’s efforts to deliver sustainable dividends despite a “tough year”. “It has always emphasised sustainable dividends in both good and bad times. With $920.2 million of net cash and no bank borrowings, we expect dividends to be maintained at this level, representing a yield of 4.4% for FY2023 despite projecting a weaker year.”
Compared to the other analysts, RHB’s Alfie Yeo’s is projecting Venture’s recovery to kick in sooner. He says he remains positive on the company over the “intermediate term”, even though its 1QFY2023 earnings underperformed estimates.
“1QFY2023 was reflective of the current weak economic environment, but we expect the global recovery to kick in as soon as Summer 2023,” says Yeo, who has maintained his “buy” rating.
While he has also pared his FY2023 to FY2025 earnings by 12% to 14% and lowered his target price to $19.26 from $22.00 due to Venture’s weak first quarter performance, he says his outlook remains upbeat in view of the “imminent global recovery”.
“While the customer outlook is currently weak due to global economic headwinds, our chief economist anticipates global economic growth and recovery to commence by the summer of 2023,” he says.
“This should strengthen customer demand and spur more aggressive program rollouts over the longer term. We have already observed early signs of a bottoming out in trade, industrial production, retail sales and Purchasing Managers Index data in many major economies in
Asia ex-Japan,” adds Yeo.
Downsides risks to his forecast therefore include a softer-than-expected recovery and decelerating global demand.
As at 3.02pm, shares in Venture were trading $1.05 or 6.16% down at $16.01, with a dividend yield of 4.4%.
