August 14, 2021

Analysts have given mixed ratings and target price forecasts for  Venture Corp  as the company grappled with a component shortage that stifled its revenue and profit growth for its 1HFY2021. 

  Venture Corp reported a 4.9% y-o-y increase in revenue to $1.43 billion and 7.6% y-o-y higher net profit of $140.4 million. 

 

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See:  Venture Corp sees 7.6% rise in 1H21 earnings declares interim dividend of 25 cents

 

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  Analysts from RHB Group Research and Maybank Kim Eng were the most optimistic, maintaining their &ldquo buy&rdquo calls and increasing their target prices to $23 and $25.13 respectively, up from $20.70 and $22. 

  RHB&rsquo s Jarick Seet expects margins to continue expanding in the quarters ahead, &ldquo from new platforms of next-generation devices and strong demand across the majority of its segments,&rdquo he writes in an Aug 10 report. 

  Elaborating on the raised target price, he says it is due to better quality execution of orders and its expertise in product design, which allows it to book margins stronger than that of its global peers.

  Furthermore, he notes that six out of Venture&rsquo s seven main customer domains are still enjoying strong demand &ndash and their growth outlook is still robust. 

  &ldquo Venture continues to see sustained demand growth for its innovative products and services in the life sciences, technology and genomics segment, as well as in next-generation sequencing and diagnostics,&rdquo Seet highlights. 

  He also points at another new area of growth, which is in liquid chromatography and mass spectrometry, and add other domains with growth potential include test & measurement instrumentation, networking & communications, advanced industrials and semiconductor-related equipment. 

 

  Finally, he is optimistic about the launch of a new platform of next-generation devices that will be slated for 2HFY2021, in its lifestyle consumer electronics section. 

  &ldquo Venture continues to develop strategic modules as well as co-develop solutions with erstwhile partners to expand its participation within these domains. We also expect margins to continue to improve, as Venture increases its product design content,&rdquo he says

    Seet is confident that the potential component shortages are likely to be mitigated as Venture has fleshed out strategies to improve its access to raw materials and enhance the assurance of supply.

  He does point out that Venture&rsquo s management has shared that not 100% of orders have been fulfilled, but that it should do better once these shortages ease.

  Seet also expects Venture to be able to continue to navigate through these shortages efficiently, and complete a higher percentage of its order backlog in 2HFY2021.

  Agreeing, Maybank KE analyst Lai Gene Lih notes that due to shortage of components, unfulfilled orders are pushed out into 2HFY2021. But he adds that &ldquo Venture believes it is well set up to mitigate most challenges precipitated by Covid-19 as it has set up working task forces that are working closely with stakeholders (e.g. customers, suppliers and governments) to overcome this.&rdquo

  He is confident that the company will be able to overcome this hurdle, highlighting that Venture has multiple strategies to improve access to raw materials and improve assurance of supply. 

  One such strategy is by redesigning the circuitry of products to use alternative components. However, he warns that full fulfilment remains contingent on the availability of components, notwithstanding the strong end-market demand. 

  In Malaysia, Venture has highlighted that its SOPs are even more stringent than local requirements, which he finds assuring as it reduces the concern of risks of forced shutdowns as a result of flouting local rules and laws.

  On the other hand, CGS-CIMB&rsquo s William Tng has maintained his &ldquo buy&rdquo call, but lowered his target price from $22.25 to $21.32. 

  He notes the company&rsquo s component shortage and the resulting mitigation strategies, but this has led him to cut revenue expectations. He writes that &ldquo although we are believers in the strong end-demand story, the reality of component shortages led us to cut our FY2021-FY2023 revenue expectations by 10.5-14.6% until the industry gets better visibility on component availability.&rdquo

  Finally, PhillipCapital&rsquo s Head of Research Paul Chew is not as optimistic about Venture as his counterparts, maintaining a &ldquo neutral&rdquo rating and unchanged target price of $19.20.

  He says that the expected rebound from last year&rsquo s supply-chain disruptions did not materialise, with 1HFY2021 revenue coming in at around 22% below pre-Covid levels. The company&rsquo s life-science and genomics products have yet to reach sufficient scale to drive growth, Chew thinks. 

 

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In addition, he is of the view that the company&rsquo s earnings growth has stalled since peaking in FY2017/2018, but he does look forward to a pick-up in order momentum and operating leverage from life science, instrumentation and medtech in 2HFY2021. 

  Chew however, does note that Venture has a &ldquo rock-solid balance sheet&rdquo . He points out that despite a need to raise inventories by $103 million to $766 million, net cash rose to $922 million as at June 2021. This was an improvement over the S$833million in net cash a year ago, with cash generated from operations in 1HFY2021 coming in at $137 million.

  On Aug 10, shares of Venture Corp closed at $19.69, with a FY2021 dividend yield of 3.9% and a price to book ratio of 2.1 times, according to Maybank Kim Eng.