UOB Kay Hian and Maybank Securities have both turned more positive on Venture Corp ahead of its full-year results reporting expected on Feb 22.
In their Jan 29 report, UOB Kay Hian’s John Cheong and Heidi Mo expect the manufacturing services provider to turn in the first quarter-on-quarter earnings growth following three prior quarters of decline.
Their optimism is based on the revenue guidance provided by Venture’s known customers, where two-thirds of them have guided growth ahead.
“These healthy outlook statements are consistent with Venture Corp’s latest outlook statement where it expects a sequential recovery in revenue,” state Cheong and Mo.
For example, Broadcom is guiding for 4% y-o-y revenue growth for its 4QFY2023; Agilent is seeing EPS growth of 30% y-o-y for FY2024; Fortive expects its 1QFY2024 revenue to grow 5% y-o-y and 7% q-o-q. Similarly, Medtronics sees FY2024 revenue growth of 5% y-o-y; Philip Morris projects 2023 revenue growth of 8% y-o-y.
On the other hand, Keysight is guiding for an 8% y-o-y drop for its 1QFY2024 revenue and Illumina expects its FY2023 revenue to drop 3% y-o-y. Thermo Fisher and Waters, meanwhile, expect their respective FY2023 revenue to be flat, according to the UOB Kay Hian analysts.
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Besides some of its customers stocking up inventory in anticipation of better sales, Venture is also hopeful that new product launches from its customers and more relocation of manufacturing activities to the Asean could improve demand for its manufacturing facilities, the analysts add.
The UOB Kay Hian analysts have also observed a stepping up in share buybacks undertaken by Venture Corp, which last November announced a plan to buy back up to 10 million shares, equivalent to 3.4% of its share base.
Cheong and Mo point out that this new share buyback plan differs from Venture Corp’s previous plan, where shares bought back were meant for employees’ share options. The shares thus far bought back under the new plan were cancelled immediately, which had the effect of improving its earnings per share.
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Under the new plan, Venture Corp has bought back 257,100 shares in two months alone at $12.80 and $13.61. In contrast, under the previous plan, the company bought back 500,000 shares at $11.71 and $13.92 between last June and November. “We believe this is a more positive signal from Venture on the outlook of the company,” the analysts say.
Venture Corp, with its cash balance of $957 million — equivalent to more than three years of earnings — has the potential to increase its dividend payout this year as well, given the company’s willingness to improve its capital management.
Typically, Venture Corp will raise its interim dividend by 5 cents in its first-half results. To recap, the last dividend increase was done four years ago in 2020. Assuming a full-year dividend payout of 80 cents in 2024, this will translate into a payout ratio of 83%, which is still a very comfortable level,” the analysts say.
On top of maintaining their “buy” call, Cheong and Mo have raised their target price to $16.37 from $14.06, which is pegged to 0.5 standard deviations (s.d.) above its long-term mean P/E of 17 times for FY2024. This is a higher multiple from the previous P/E of 14.6 times, to capture the potential earnings recovery in 2024 and upcycle beyond that.
Venture Corp is now trading at 13.9 times FY2024 earnings, or 9 times ex-cash 2024, which is below its long-term P/E mean and offers an attractive dividend yield of 5.6%, state Cheong and Mo.
Cheong and Mo’s current target price of $16.37 makes them the most bullish among the 12 brokers with active coverage on the stock. The least bullish call is by Phillip Securities’ Paul Chew, who rates the stock “neutral” and worth $12.50.
In general, investors have turned somewhat positive on Venture Corp in recent weeks. It was trading at $11.50 when it was at its most recent trough last October. It has since gained around 16%.
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In his report on Jan 31, Maybank Securities’ Jarick Seet describes Venture Corp as a “safe haven” in a “crazy tech world”, given positive attributes such as its strong balance sheet, yield of 5.6% and share buybacks.
Similarly, Seet sees a stronger 4QFY2023 over the preceding 3QFY2023, led by the commencement of new products, with more to follow. In addition, inventories of customers have depleted and more orders are likely in 2024.
With the ramp-up in volume, Venture Corp can then enjoy better operating margin and higher operating leverage although Seet cautions there might still be some pressure. “As a result, we are now more confident 3QFY2023 was the bottom for Venture Corp and expect revenue and patmi growth in FY2024.”
The share buybacks being undertaken by the company are also taken positively by Seet. “We believe this is a strong indication that management believes that Venture Corp is undervalued and we expect earnings per share to be positively impacted as more shares are purchased after the blackout period. This is also the first time in years Venture has established such a plan where shares are cancelled immediately after purchase,” he says.
Having raised his FY2024 and FY2025 earnings forecasts by 1.2% and 3.8% respectively, Seet’s new target price for Venture Corp is $15.50, up from $15.40 previously.
