• 1Q23 results were below expectations. Revenue and PAT were 20%/20% of our FY23e forecast. PAT was the lowest in almost three years.
• Guidance by the company is that demand weakness is expected in the near term. Customers have turned more cautious in their orders.
• We cut our FY23e PATMI by 13% to S$311mn as we lowered revenue by 12%. Our recommendation is downgraded from ACCUMULATE to NEUTRAL. Our target price is lowered to S$17.10 (prev. S$19.70), 16x PE FY23e. There remains little visibility of a recovery. Demand continues to be weak. New product introduction that is expected to ramp up in coming quarters and migration of products away from supply chains in China will stem some of the weakness in demand.

The Positive

+ Improvement in net cash position. Net cash has improved by S$105mn YoY in 1Q23 to S$920mn. The high-interest rate environment with fixed deposit rates at 4% to 5% will be supportive of earnings this year.

The Negatives

- Inventory elevated ahead of slowdown. Venture exited 1Q23 with an inventory of S$1.017bn (1Q22: S$1.152bn). Annualised inventory days are around 138 days vs pre-pandemic average of 100 days. We believe there is excess inventory ahead of the coming slowdown in revenue.

- Revenue shrinking again. After enjoying revenue growth for the past five consecutive quarters, 1Q23 fell by 7.6% YoY. Our initial expectation was a modest 5% improvement in revenue for FY23e. 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 S$4bn achieved in FY17.

Outlook

Weakness in demand is across most sectors. Venture has performed better in instrumentation, life science and consumer luxury. Areas of future growth include electric vehicles and life sciences. To grow market share, Venture can migrate certain products out of China to SE Asia or help in the redesign of products. Demand is expected to remain weak in the near term as customers are cautious about their orders.

• FY22 results were within expectations. Revenue and PATMI were 102%/97% of our FY22e forecast. 4Q22 PAT rose 3.4% YoY. Gross margin was the weakest in seven years.
• There was caution in the company’s outlook. The environment in the short term is uncertain. Healthcare, life science and semiconductor sectors are the medium-term opportunities with their long product cycles.
• We lower our FY23e PATMI by 9% to S$359mn and downgrade our recommendation from BUY to ACCUMULATE. Our target price is lowered to S$19.70 (prev. S$20.80), 16x PE FY23e. The macro backdrop for electronic exports has declined significantly and the global economy slowing.

The Positive

+ Healthy growth in revenue. 4Q22 revenue grew 15% YoY to S$1.04bn, the 2^nd highest December quarter since 2017. Growth was from the life science, medical device and healthcare domain. Pre-pandemic, revenue growth was a negative 4% from FY17 to FY19. We also expect revenue growth to slow in 2023 with the absence of the Malaysia re-opening lift experienced in 2022.

The Negative

- Major decline in margins. 2H22 gross margins declined 2.1% points to 23.7%, the lowest levels since 2015. We believe Venture had to absorb the higher-priced raw materials which were bulked up over the past few quarters. Venture still maintains a high S$1bn of inventories. There was operating leverage at the operating cost level due to the appreciating US dollar.

• 9M22 PAT was within expectations at 71% of our FY22e forecast. 3Q22 PAT jumped 27% YoY to S$97.4mn. The improvement was in part due to lockdowns in Malaysia a year ago.
• The company said that growth was across all sectors. We believe the strong US dollar was another tailwind to growth.
• We lift our FY22e revenue by 4% but maintain earnings as we lower margin assumptions. Our BUY recommendation and target price is unchanged at S$20.80, based on 16x PE FY22e. Venture’s dividend yield and valuation are attractive. However, we are cautious for FY23e and lower our revenue growth rate to 3% (prev. 7%). Macro uncertainty may push customers to turn cautious on their forward orders.

Results at a glance

Source: Company, PSR #Note – Only selected financials are provided in the 3Q22 update.

The Positive

+ Broad based revenue growth. Revenue growth was broad-based across all verticals. The S$1bn revenue per quarter is back to FY17 levels and the 2^nd highest for a September quarter.

The Negative

- Inventory is elevated; higher effective tax. Inventory is up S$345mn YoY to S$1.25bn. The jump is to cater to rising sales demand and buffer for any supply disruptions. Another drag to earnings was the higher effective tax of 18% in 3Q22 (3Q21: 12.6%) due to lower tax incentives.

Outlook

Venture is expanding capacity in Malaysia to cater to improving demand. The trend to outsource more production into SE Asia away from China is a multi-year tailwind for Venture. However, macro uncertainty could dampen customer orders in the near term.

Maintain BUY with a unchanged TP of S$20.80

Our FY22e revenue is increase by 4% but net margins lowered on declining gross margins and higher effective tax rate.

• 1H22 Revenue/PATMI was within expectations at 53%/48% of our FY22e earnings. 2Q22 PATMI jumped 21% YoY to S$90mn, back to pre-pandemic levels.
• Venture is coping with the supply chain constraint by piling up inventories. 2Q22 registered a 63% jump in inventories or S$483mn rise to S$1.25bn.
• The guidance for 2H22 is positive with customer demand remaining unabated. We lift our earnings by 5%, to account for a stronger 2H22. Our target price is modestly nudged up to S$20.80, based on 16x PE FY22e, its 5-year average. There is no change to our BUY The dividend yield is healthy at 4.5% with earnings rebounding from lockdowns a year ago and improvement in the supply chain.

The Positive

+ Customer demand robust. Revenue growth was broad-based across all verticals. Some demand continues to be unmet due to supply chain challenges. Revenue in 2Q22 was the 2^nd highest since 2Q18.

The Negative

- Increase in effective tax rate. The higher effective tax was a negative surprise. It jumped to 18% in 1H22 due to lower tax incentives in Singapore. The effective tax was trending around 14% pre-pandemic. A possible reason for the decline in incentives is the lower CAPEX and R&D expenses over the past several years.

Outlook

FY22e is on track to become a recovery year for Venture. Demand from customers is healthy and unabated, especially from last year’s disruption that included factory shutdowns in Malaysia and the inability to fulfil demand.

Maintain BUY with a higher TP of S$20.80 (prev. S$20.00)

We lift our FY22e revenue and earnings forecast by 7% and 5% respectively. Our effective tax rate for FY22e is raised from 14% to 17%.

• 1Q22 PAT rose 28% YoY to S$84mn and beat our estimates by 10%. It was the 2^nd highest Mar quarter for Venture. PAT was 23% of our FY22e forecast.
• Venture has coped well with supply chain challenges through a strong balance sheet to bulk up on inventories and re-design of products with new components.
• Outlook remains upbeat with customers committing to six to 12 months of visibility. We also believe new products especially life science are gaining more traction. Despite the earnings beat, we maintain our FY22e PATMI. We are incorporating a buffer as the slowing macro environment remains a concern. The target price of S$20.00 is unchanged and based on 16x PE FY22e, its 5-year average. Our recommendation is upgraded from ACCUMULATE to BUY. The current share price offers a 5% dividend yield with an attractive unlevered ROE of 13% and a net cash balance sheet of S$808mn.

Results at a glance

Source: Company, PSR #Note – Only selected financials are provided in the 1Q22 update.

The Positive

+ Revenue building up momentum. Revenue momentum has picked up since 4Q21. Revenue is recovering to pre-pandemic levels as factory closures and supply chain disruptions over the past two years start to ease.  Due to long lead times and shortages, Venture has managed to re-design products with alternative components.

The Negative

- Inventories spiked almost 70% YoY to S$1.1bn. To support customer orders, Venture needs to hold inventories of semiconductors, materials and other components. It is a near-term drag on working capital. Both receivables and inventory are up S$680mn YoY. The additional working capital required was $370mn to fund the $283mn increase in revenue over the past 12 months as payables jumped by S$305mn. Net cash dropped to S$815mn from S$989mn a year ago.

Outlook

We expect FY22e to be a recovery year for Venture as: (i) There is order visibility as customers make longer-term commitments to ensure supply; (ii) Growth is broad-based across six of their seven key industries; (iii) Rebound from last year’s factory shutdown in Malaysia; and (iv) New products gaining more traction with customers, namely in life science and lifestyle and wellness.

Upgrade to BUY from ACCUMULATE with an unchanged TP of S$20.00

Our FY22e revenue and earnings forecast are unchanged.

• Results met expectations. FY21 revenue and PATMI were 99% and 100% respectively of our estimates. 4Q21 revenue was up 9% YoY to S$905mn, recovering from a disrupted 3Q21. Final dividend of 50 cents unchanged from last year.
• Manufacturing returned to full capacity in Malaysia around September. But semiconductor shortages persisted in 4Q21.
• We raise FY22e PATMI by around 4%. The target price is also being increased to S$20.00 (previous S$19.20). The target price is based on 16x PE FY22e, its 5-year average. Our recommendation is an upgrade from NEUTRAL to ACCUMULATE. We expect stronger growth in FY22e. Order pipeline is healthy across all verticals but the availability of components will dictate the ability to fulfil demand. We believe Venture can better navigate these challenges with a record S$1bn build up in inventory and a higher readiness than in the past. The share price is supported by dividend yields of almost 5%, 13% ROEs and S$808mn net cash.

The Positive

+ Recovery in revenues. Revenue rebounded 9% YoY to S$905mn, just 3% shy of pre-pandemic levels. We believe some of the growth was driven by spill-over from prior quarter shutdowns in Malaysia. Growth was across all verticals.

The Negative

- Cash-flow generated lower due to inventory build-up. Free cash flow generated in FY21 was S$91mn, a sharp drop from FY20 S$425mn. Around $382mn of working capital has been deployed to build up inventory to cope with component shortages. FY21 capex was a record low of S$11mn. Net cash in the balance sheet stands at S$807.9mn (FY20: 928.7mn).

Outlook

Venture guided that demand is robust based on customer orders and forecast across all sectors. Notable strength is from analytical instruments, gene sequencing, instrumentation and lifestyle and wellness products.

Upgrade to ACCUMULATE from NEUTRAL with a higher TP of S$20.00

Our FY22e revenue is unchanged but PATMI is raised by 4%.

• Results were below forecast. 3Q21 PATMI declined 4% YoY to S$77mn. YTD21 Revenue and PATMI were 66% and 63% respectively.
• Fulfilment of customer orders disrupted by global components shortages and the Extended Movement Control Order (or factory closures) in Malaysia.
• We are lowering our FY21e revenue and PATMI by 6% and 10% respectively. Recovery this quarter has been stalled due to production disruptions. The company mentioned that demand is healthy and broad-based demand. In addition, the workforce in Malaysia is almost fully vaccinated, which should allow manufacturing activities to resume as normal. We expect some spill-over of orders into 4Q21. We maintain our NEUTRAL recommendation. Our target price is rolled over to 16x PE FY22e, its 5-year average. Re-opening and removal of lockdown should ease pressure on the supply chain in FY22e. The share price is currently supported by dividend yields of 4.5%, 11% ROEs and S$853mn net cash.

The Positive

+ Healthy balance sheet and margins. Net margins improved marginally to 10%. We assume the high-value low mix projects have been sustaining margins despite the weaker revenue and loss of operating leverage. Net cash was S$853mn at 3Q21. There was a spike in inventory by S$154mn YoY to S$908mn. We believe there is buffer inventory to cope with the unpredictability in component supply.

The Negative

- Another weak quarter in revenue. Pre-pandemic, the quarterly run-rate in revenue was around S$900mn. This has dropped to S$700m this year. Venture has struggled to keep revenues to pre-pandemic levels these past two years despite the global resurgence in electronics demand. The pivot to life science and consequent long timeline to ramp up is a factor, in our opinion. We expect revenue to rebound in 4Q21e to S$916mn, an 11% YoY rise.

Outlook

Venture commented that new product introductions are expected to flow to mass production over the next 12 months.

Maintain NEUTRAL with unchanged TP of S$19.20

Our FY21e and FY22e PATMI is lowered by 10% and 11% respectively

• 4Q20 net profit declined 10% YoY to S$86.6mn. FY20 profit was in line at 101% of our forecast Revenue was slightly below at 96%.
• Net cash piled to a record S$928mn, supported by FCF of S$425mn in FY20.
• VMS is pivoting to new growth drivers: electric-vehicle (EV) batteries and wafer-fab equipment. EVs are expected to experience explosive multi-year growth, especially in the Chinese market. VMS intends to expand its manufacturing cluster in China. Equipment for gene sequencing is another exciting area undergoing massive innovation.
• Remain NEUTRAL. We nudge up FY21e PATMI by 3%. Accordingly, our target price climbs to S$19.20 from S$18.60, still at 5-year historical average P/E of 16x. Attractive 4% yields are backed by a large cash hoard.

The Positive

+ Margins stable. Despite weaker revenue, VMS managed to contain costs and expand PBT margins by 1.2% points to 11.9%. 2H20 GP margins rose to 26.1% from 25.2% in 2H19 (Figure 1).  This was aided by a higher mix of life-science products. Operating expenses such as staff and other expenses fell in line with the weaker revenue.

+ Record operating cash flows. Net cash jumped 30% to a record S$928mn in December 2020. Operating cash flows in FY20 were S$453mn. Positive working-capital generation of S$114mn was largely due to a normalisation of trade debtors in early 2020.

The Negative

+ Revenue softer than expected. Revenue only improved a modest 1% QoQ to S$828mn. Average improvement in the prior two quarters was 12%. We believe the drag came from weaker point-of-sale terminals. A sluggish retail environment due to the pandemic reduced the need for such terminals. On the other hand, demand for ventilators and diagnostic equipment rose.

Outlook

FY21 should be a year of recovery from a supply-chain-disrupted 2020. A stronger global economy should, moreover, provide impetus to VMS’ earnings growth. To exceed its record earnings of FY17/18, VMS is pivoting to new product categories such as EV batteries, wafer-fab modules and gene-sequencing equipment. Some products are new introductions that will require time to scale up. China is becoming a key market for potentially vast healthcare and EV demand. VMS will raise its manufacturing and engineering presence in China.

Maintain NEUTRAL with a higher TP of S$19.20, from S$18.60

We increase FY21e earnings by a modest 3%. Net cash of S$928mn, dividend yields of 4% and ROEs of 13% remain attractive investment merits of the company.

• 3Q20 PATMI dropped 5.9% YoY to S$80.2mn - 14% below our forecast.
• We had expected 3Q20 to be stronger due to orders carried over from Q2 when facilities were partially shut because of lockdown.
• Maintain NEUTRAL. FY20e could be 3^rd consecutive year of earnings decline since peaking in FY17. New projects are limited. We cut FY20e earnings by 12%. We roll over TP to 16x FY21e from FY20e, still based on its average PE in the past five years. Our TP climbs to S$18.60 from S$18.40. Net cash of S$829mn, yields of 4% and ROEs of 13% are expected to provide support.

The Positive

+ Margins stable. PBT margin was stable YoY at 11.4% despite lower revenue. The was likely due to a higher mix of products in life science & genomics, medical devices and healthcare & wellness. There was strong demand for essential healthcare products such as ventilators and PCR equipment.

The Negative

+ Revenue weaker than our expected +12% YoY rise. We had expected a spillover of revenue from 2Q20 when factories were closed because of lockdown. It seems orders in 3Q20 were softer than expected, likely due to macro headwinds.

Outlook

VMS guided that 2H20 will be stronger than 1H20. This is to be expected since 1H20 earnings  collapsed 28% YoY. Moving into 2021, we anticipate a recovery led by new products that VMS mentioned would be released by customers. These will likely be in the healthcare sector, including Covid-19 related detection, testing and diagnostic products. Another driver of growth could be an improvement in macro conditions.

Maintain NEUTRAL with higher TP of S$18.60, from S$18.40

We cut FY20e/FY21e PATMI by 12%/10% to S$293mn/S$338mn following lower-than-expected sales.  Recovery is slower than expected but net cash of S$829mn, yields of 4% and ROEs of 13% are expected to provide share-price support.

• Results were within expectations. 1H20 revenue and PATMI fell 25% and 28% YoY to S$1.36bn and S$130.6mn respectively. The interim dividend was raised 25% to 25 cents.
• Manufacturing activities were restricted in April either directly impacting the factory or indirectly via the supply chain due to the lockdown. Operations rebounded swiftly in May and June and expected to recover further into the 2H20.
• We are downgrading to NEUTRAL with a higher target price of S$18.40 (prev. S$16.60). We lowered our FY20e revenue estimates by 2% but PATMI was raised by 5%. Our gross margin forecast is increased by 1% point to 26%.  We nudged up our valuation metrics to 16x PE (prev. 15x).  Higher valuation is warranted as recovery is underway and earnings temporary depressed by the pandemic.  VMS is paying an attractive 4.4% yield, well supported by an S$833mn net cash balance sheet. New life science projects and shift in the supply chain from China to SE Asia will be supportive of revenue growth.

The Positive

+ Increase in dividends With the increase in net cash to S$833mn as at Jun20 (Jun19: S$760mn), the interim dividend for 1H20 increased to 0.25 cents (1H19: 20 cents).

+ Gross margins surged. 1H20 gross margins stood at 26.6%m almost 2% point increase YoY. This was a surprise despite the lower revenues and economies of scale. Reason for the higher margins was due to the difference in product mix.

Outlook

2H20 is expected to be stronger than 1H20 which essentially lost one month of revenue. We expect some spillover of uncompleted orders to occur into 2H20. Venture mentioned a number of new products to be released in early 2021.

Downgrade to NEUTRAL from ACCUMULATE with higher TP of S$18.40 (prev. S$16.60)

We raised our FY20e PATMI by 5% and valuation metric to account for the higher visibility in the recovery as the lockdown eases.