Tuesday 5 May 2015

Venture Corporation

OCBC on 4 May 2015

As the first quarter is always weak for Venture Corporation Limited (VMS), its 1Q15 revenue were within our expectations as it grew 3.0% YoY to S$608.7m, and formed 23.1% of our FY15F forecast. However, its PATMI came in slightly below our expectation as it reported a 5.8% YoY growth to S$32.6m, which formed 21.1% of our FY15F forecast. The lower PATMI was the result of the unexpected higher tax expense. Going forward, management guided that there are more opportunities to grow through the Test & Measurement and Medical & Life Science segment. We think the expected recovery in U.S. will help sustain VMS’ steady top-line growth with improving margins since cost management and productivity gains have always been management focus to drive efficiency. As we factor in 1Q15 results and VMS’ outlook, our FV remains unchanged at S$8.41 (still based on 15x FY15F P/E). Hence, we maintain HOLD on VMS, supported by a decent FY15F dividend yield of 5.9%.

Higher tax expense erodes 1Q15 earnings
As the first quarter is always weak for Venture Corporation Limited (VMS), its 1Q15 revenue were within our expectations as it grew 3.0% YoY to S$608.7m, and formed 23.1% of our FY15F forecast. However, its PATMI came in slightly below our expectation as it reported a 5.8% YoY growth to S$32.6m, which formed 21.1% of our FY15F forecast. The lower PATMI was the result of the unexpected higher tax expense, which jumped 91.8% YoY to S$5.7m, indicating an effective tax rate of 14.9% against our assumption of 10.0%. The higher tax expense was mainly due to changes in sales mix to more products that do not enjoy tax incentives granted to VMS. Despite the higher tax expense, 1Q15 net margin increased 0.14 ppt YoY to 5.4% while PBT margin still grew 0.59 ppt to 6.3% on disciplined cost management and improved productivity. We believe the improved PBT margin was also driven by growth in its higher-margin segments such as medical and life science.

Growth to sustain and gross margin to improve
Going forward, management guided that there are more opportunities to grow through the Test & Measurement and Medical & Life Science segment as many of the new customers acquired over the past few years are in this segment. We expect contributions from these customers to grow as projects are still relatively new. We also believe the margins in this segment are likely to be higher than other segments as VMS performs more value-adding services to the customers. Furthermore, market watcher Gartner still expect worldwide semiconductor sales to grow 4.0% in 2015 to reach US$354b. With ~80% or more of its customers based in U.S., we think the expected recovery in U.S. will help sustain VMS’ steady top-line growth with improving gross and PBT margins since cost management and productivity gains have always been management focus to drive efficiency.

Maintain HOLD
As we adjust on our model for higher margins segment to drive growth, the positive impact is offset by our higher effective tax rate assumption. Consequently, our FV remains unchanged at S$8.41 (still based on 15x FY15F P/E). Hence, we maintain HOLD on VMS, supported by a decent FY15F dividend yield of 5.9%.

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