• 1Q20 PATMI fell 34% YoY to S$20.8mn, below our forecast.
• Disruption in the supply chain due to lockdowns in China and Malaysia affected the fulfilment of orders.
• As at end-April2, almost all operating entities have resumed their operations with minimal constraints.
• Maintain ACCUMULATE. Our target price is lowered to S$16.60 (prev. S$18.10). We shaved around S$220mn of revenue for FY20e, equivalent to the dollar drop in 1Q20 revenue. PATMI for FY20e is shaved by 15%. We expect VMS to recover some lost revenue in 2Q20 as it ramps production. The longer-term merits on VMS is unchanged – capturing larger profit share in the global EMS sector, capitalising on further outsourcing of supply chains into SE Asia from China, while paying an attractive 4.4% yield and enjoying a healthy balance sheet with net cash of S$852mn as at 1Q20.

The Positive

+ Margins were surprisingly resilient. 1Q20 PBT margin of 10.4% is a decline from a year ago but is much higher than margins in 2016-17 despite the similar revenue levels. Past three years have seen Venture increase their value-add activities and reduce their fixed cost.

+ Net cash at record levels. Net cash of S$852mn is at record levels for VMS. The surge is due to the repayment of lumpy trade receivables extended end of last year. The high cash holding was despite the increase in inventories of around S$100mn QoQ.

The Negatives

– Disruption in China and especially Malaysia. 1Q20 revenue collapsed by 27.5% YoY (or a S$255mn drop). This is roughly one-month’s worth of revenue. Our initial estimates for revenue growth for FY20e was a modest 1% improvement. We now forecast a 5% decline.

Outlook

VMS mentioned that “by end April, most if not all of its operating entities received exemptions to operate without headcount or working hours constraints”. As the company is heavily involved in the production of medical equipment, their activities are deemed essential. 

Maintain ACCUMULATE with lower TP of S$16.60 (prev. S$18.10)

We are lowering FY20e revenue and PATMI by 6% and 15% respectively. We are raising our PE multiple target from 14x to 15x. We believe this is warranted to compensate for the temporarily depressed FY20e earnings.

#Note – There was no results briefing or detailed financials for the 1Q20 results. Only an executive summary and general comments were furnished.