Venture Corporation Ltd – Stronger recovery in 2H20 August 11, 2020 184

PSR Recommendation: NEUTRAL Status: Downgraded
Last Close Price: S$19 Target Price: S$18.40
  • 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.

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About the author

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Paul Chew
Head of Research
Phillip Securities Research Pte Ltd

Paul has almost 20 years of experience as a fund manager and sell-side analyst. During his time as fund manager, he has managed multiple funds and mandates including capital guaranteed, dividend income, renewable energy, single country and regionally focused funds.

He graduated from Monash University and had completed both his Chartered Financial Analyst and Australian CPA programme.

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