Venture Corporation – Net profit likely still weak

Excerpts from CGSCIMB report

Venture Corporation (SGX: V03)

• Venture Corporation Ltd reported its 3Q business update on 4 Nov last year. We think it could be reporting its 3Q23 update on 3 Nov 2023.
• We project 3Q23F net profit decline of 34.3% yoy and 3.6% qoq to S$64.0m as its customers continued to deplete their inventories during the quarter.

Our TP is reduced slightly to S$16.61 as we roll over our valuation to FY25F P/E and apply a lower 14.6x P/E multiple (15-year average).

2H23F likely to be weaker than 1H23

Our earlier view post Venture’s 1H23 results announcement was that its 2H23F net profit could mirror its 1H23 net profit. We now think it would likely post a 3Q23F net profit decline of 34.3% yoy and 3.6% qoq to S$64.0m as its customers had continued to digest inventories during the quarter. Hence, we cut our FY23F net profit forecast by 4.5% to S$270m. Note that Venture’s 1H23 results were disappointing, with revenue declining 11.9% yoy to S$1,582.2m, while net profit fell 19.7% yoy to S$140.0m. The 11.9% decline in 1H23 revenue was due to softening demand and ongoing inventory destocking at its customers’ end.

FY24-25F outlook likely to remain cautious

We remain cautious on Venture’s revenue outlook for FY24-25F as we believe demand from customers could remain soft. We project FY24F and FY25F revenue growth at 5.0%, which appears reasonable against Bloomberg consensus revenue growth expectations (as at 6 Oct 2023) of 5.2%/7.8% (simple average) for Venture’s customers. We cut FY24-25F net profit by 2.4-2.9% as we believe its net profit margins could be pressured by the slow revenue growth; we trim our FY24-25F net profit margin forecasts by 0.2-0.3% pt.

Lower S$16.61 TP on rollover

As we roll over our valuation to FY25F P/E and use a target P/E multiple of 14.6x (15-year average), our TP declines slightly to S$16.61. Previously, we used Venture’s 23-year average forward P/E of 15.2x. We also trim our FY25F EPS forecast by 2.9% as the slower revenue growth could lead to 0.3% pt decrease in net profit margin. This leads to a lower TP of S$16.61. We reiterate our Add call, given its 6.11% dividend yield and potential for EPS growth resumption in FY24-25F. We expect Venture to maintain its FY23-25F DPS at S$0.75 as its net cash balance as at end-Jun 2023 was S$895.6m and we expect limited capex requirements over FY23-25F. Re-rating catalysts are new product launches by customers, further improvements in component availability, and further business opportunities arising from corporations that are keen to diversify their production orders from China to Malaysia. Key downside risks are:

• the ongoing supply chain disruptions affecting the availability of parts and components, impacting its production
• labour  shortages potentially lowering its production output, and
• a worsening global economic outlook potentially further reducing orders from customers

You can find the full report here and the company website here.