Venture Corp's 3QFY2023 earnings came in lower than expected but with a more positive outlook, analysts from Maybank Securities and UOB Kay Hian have upgraded their calls on this stock from "hold" to "buy".
On Nov 4, the company reported earnings of $66.4 million for its 3QFY2023, lower than the $70.2 million Jarick Seet of Maybank Securities was projecting, as the company's cost-cutting measures were outpaced by the drop in its revenue.
However, Seet believes that 3QFY2023 should be the bottom for Venture, whose management has indicated that revealed that certain New Product Introductions (NPIs) will have started in the current 4QFY2023 and more are slated in the coming FY2024.
"Customer inventory levels are also down sharply and we should see more orders placed in 4Q. With a brighter outlook, we think that the worst is over," writes Seet in his Nov 5 note.
Seet is of the view that Venture's share price, which has dropped around 30% year to date, has "overcorrected". At current levels, the company, which is sitting on a growing cash pile of $956.65 million, offers a yield of 6.2% yield - assuming it maintains its dividend payout at 75 cents per share.
"Management has always emphasised sustainable dividends in both good and bad times," notes Seet.
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Nonetheless, with a slightly trimmed earnings forecast for FY2023 and FY2024, Seet has similarly cut his target price to $14 from $14.30, which is pegged to 14.5x FY2023 earnings.
Similarly, in their Nov 6 note, UOB Kay Hian analysts John Cheong and Heidi Mo point out that Venture Corp's 3QFY2023 results came in lower than they expected, although they continue to like the company for its strong cash balance and "decent" yield of more than 6%.
However, as the share price has dipped to a level they deem "compelling", they've upgraded their call from "hold" to "buy".
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Even so, they expect Venture to report 7% lower revenue for FY2023 through to FY2025, no thanks to near-term demand weakness and a more challenging macro environment.
As they've dialled back their FY2023 and FY2024 earnings forecast by 4% and 5% respectively as well, Cheong and Mo have cut their target price from $14.60 to $14.06, which is pegged to 14.6x FY2024 earnings, a valuation multiple that is in line to its long-term forward mean.
On the other hand, Ling Lee Keng of DBS Group Research, in her Nov 5 note, has maintained her 'buy' call, but with a slightly trimmed target price of $15.10 from $15.40.
She cautions that Venture Corp is not immune to macro-economic headwinds in the near term, even though longer-term growth strategies in place.
"Despite our optimism, there is a possibility that 4QFY2023 performance may still be muted. However, it should still be better than 3QFY2023. We are already seeing a slowdown in q-o-q decline with 3QFY2023’s revenue and net profit compared to the previous two quarters," says Ling.
In the longer term, Venture continues to invest and develop new differentiating capabilities across multiple technology domains to pave the way for future growth, including the likes of life sciences, medical, and healthcare.
Similar to Seet, Ling notes that Venture's strong cash balance will not only support the dividend payout at 75 cents per share, it is also a "strong war chest" should the company eye inorganic growth.
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Meanwhile, she expects earnings to drop 27% y-o-y for FY2023 followed by a recovery of 14% in the coming FY2024. Her new target price of $15.10 is pegged to 14x FY2024 earnings - a valuation multiple of -1 standard deviation from its four-year average.
"We believe the sharp decline in share price is excessive. With valuations below the previous trough level, we believe the upside risk outweighs the downside," says Ling.
William Tng of CGS-CIMB, in his Nov 3 note, points out that his forecast of Venture's 3QFY2023 earnings was "spot on".
He expects the 3QFY2023 earnings to be the trough and that 4QFY2023 will see an improvement of 5.4% q-o-q, as customers replenish depleted inventories.
Despite the projected recovery, earnings for 4QYF2023 will still be down 31.9% y-o-y because of the higher base in 4QFY2022.
Tng's relatively bullish target price of $16.61, which he has maintained along with his "add" call, is based on the same 14.6x FY2025 earnings, which is a 15-year average.
Potential re-rating catalysts, according to Tng, will include new product launches by customers; further improvements in component availability and better-than-expected revenue opportunities over FY2024 to FY2025 as further business opportunities arise from corporations keen to diversify their production orders from China to Malaysia.
On the other hand, key downside risks include ongoing supply chain disruptions affecting the availability of parts and components; labour shortages potentially lowering its production output, and last but not least, a worsening global economic outlook potentially further reducing orders from customers.
Citi Research's Jame Osman has similarly kept his "buy" call, but with a reduced target price of $16.30 from $17.60, as he factors in lower earnings estimates.
"Despite near-term uncertainty, we believe Venture remains a structural beneficiary of supply chain de-risking and relocation trends favouring outsourced manufacturing into South-East Asia manufacturing hubs such as Malaysia," writes Osman in his Nov 6 note.
He also recognises that Venture has made headway to diversify its customer base into growth domains, which adds to his optimism that revenue trends have bottomed and a better FY2024 lies ahead.
Venture Corp closed Nov 6 at $12.32, up 1.23% for the day.
