September 9, 2019

We remain constructive on Venture Corp (VMS)’ long-term prospects despite the current challenging operating environment, as i) customers historically show – and continue to demonstrate – revenue resilience; ii) end-markets appear broadly stable; and iii) potential from growth markets, new products and higher allocations by customers as a result of the US-China trade war is intact. We see room for DPS surprises, supported by strong FCF.

Risks to our view include broad customer weakness due to a US/ global recession.

VMS has a broad base of 100 active customers, mostly based in the US. We compare their revenue growth with broader US manufacturing. Historically, these customers demonstrated earnings growth even when the ISM fell YoY. This may be traced to the resilience and diversity of their end-markets, such as in life sciences and 5G-related spending. Notable exceptions were GFC and the 2015 economic slowdown.

VMS’ customers to deliver revenue growth in 2020E. Revenue expectations have been stable. This suggests that barring company-specific events, most end-markets are firm. Of VMS’ top 100 customers, most are still experiencing revenue growth. VMS remains on track to introduce/ ramp-up new products in 3Q/4Q19 respectively.

Based on our ROE-g/COE-g analysis, we believe its share price has priced in an FY18-21E earnings CAGR of -8%. We believe this to be unlikely, unless there is a full-blown recession in the US/globally. Even if FY18- 21E earnings CAGR turns out to be -11%, implying a fair value of SGD14.00, we believe VMS’ FCF generation should still be able to fund DPS of SGD0.80 pa for a potential 5.3% yield which should mitigate total returns downside from current levels. Maintain BUY with ROE-g/COE-g TP of SGD18.88 (2.2x FY19E P/BV). – MayBank Kim Eng

Venture Corp closed at: S$15.40