Venture Corp: Looking beyond a weak 2023
- Upgrade to BUY; trading at trough valuation despite solid financials
- Industry leaders in Venture’s technology domain expect a better 2024, which will benefit Venture’s earnings outlook
- Not immune to macro-economic headwinds in the near term; longer term growth strategies in place
- No change in earnings and TP of S$15.40
- Trading at trough valuation. Venture’s share price has plunged 25% since our downgrade call in May 2023, after the release of weaker than expected 1Q23 results. Besides the muted outlook, the weak share price performance was also due to portfolio rebalancing from its removal from the MSCI Singapore Index. At current FY23F/FY24F PE of 12.6x/11.2x, the stock is trading at the previous low in March 2020, which was due to the COVID pandemic. We believe the attractive valuation should not be ignored for a company with strong financials, above-peers’ net margins and high net cash as % of market capitalization at 24%.
- Industry leaders in Venture’s technology domains expect a better 2024. Though the outlook for 2023 is muted, 2024 is expected to be a better year.
- Higher DPS on the cards? With its strong net cash position, we believe there is a possibility that Venture could increase its DPS of 75Scts (5.9% yield) once the outlook improves.
Rationale for upgrade:-
- Trading at trough valuation
Weak demand coupled with MSCI portfolio rebalancing led to a steep decline in PE. Venture’s PE valuation has plummeted to more than 2SD below its four-year average and is now at the depressed level seen in March 2020 when valuations were hit by the COVID pandemic. Besides the bleak outlook caused by weak demand for consumer electronics, Venture’s share price was also hit by portfolio rebalancing as it was removed from the MSCI Singapore Index list at the close of 31 August 2023.
A value trap or attractive entry level to position for an anticipated recovery in 2024? At the current valuation of c.12x, Venture is now trading on par with its global peers. Compared to Singapore-listed peers, the valuation is still c.10% above its peers, which can be justified by its high net margins of close to 10%, vs low single digits of its peers. Furthermore, Venture is also in a strong net cash position, vs mainly net debt for its global peers.
The key question is whether the current valuation is a value trap or at an attractive level to position for an expected recovery in 2024? We believe the latter is more probable. Although near term weakness in 2H23 is likely to persist, we look forward to a better FY24F, on the back of the green shoots of recovery, including reduction of inventory levels and easing inflationary pressure. - Industry leaders in Venture’s technology domains expect a better 2024
Partners with industry leaders. Venture’s performance is largely linked to its customers in the various technology domains. Leveraging on its deep technical knowledge and skillsets across the diverse industries, Venture collaborates and supports many global industry leaders across wide-ranging domains. Venture’s strategy is to work closely with key leaders in their respective fields. The group supports partners in launching new products relying on its capabilities across various technology domains, such as Life Science, Healthcare & Wellness, Instrumentation and Networking & Communications.
Though contribution to earnings could be lumpy depending on the launch of the new product initiatives, this strategy bodes well for Venture to ensure earnings consistency in the longer term.
Diversified customer base. Venture has more than 100 key customers. Its top 10 customers account for about 64% of its trade receivables balance at the end of 2022 (2021: 59%). So far, only one customer accounts for more than 10% of the group’s revenue.
Tailwinds from the new economy. The group sees strong tailwinds in sectors such as electric vehicle ecosystems, renewable energy infrastructure, industrial IOT, 5G and cloud.
Test & Measurement, Medical & Devices and Life Science segments to drive longer term growth
In the Life Science & Genomics technology domain, Venture supports its customers in various high growth market segments such as manufacturing a wide range of equipment in liquid chromatography, mass spectrometry, spatial transcriptomics and digital PCR. These instruments are used widely in food/water quality testing, research on infectious diseases and development of medical drugs, amongst others. An emerging longevity industry has also led to developments in lifestyle consumer tech and AI-based diagnostics which represent exciting growth opportunities for Venture. Overall, this cluster is still at the nascent stage of development.
Industry growth in the longer term. The global genomics market in terms of revenue is estimated to be worth US$46.2bn in 2023 and poised to reach US$83.1bn by 2028, growing at a compound annual growth rate (CAGR) of 12.4% from 2023 to 2028, according to Markets and Markets forecast.
The global DNA polymerase market size was valued at US$132.6m in 2022 and is expected to grow at a CAGR of 1.30% from 2023 to 2030. Growth is expected to be stronger in the coming years, propelled by increasing demand for sequencing applications and development of precision medicine, according to Grand View Research.
Dissecting the outlook for Venture’s technology domain by evaluating expectations of leading industry players
Generally expecting weaker results for 2023, improving outlook for 2024.Lab instrument makerAgilent Technologieshas lowered its FY23F guidance due to weakness in China. Consensus expects growth to resume in FY24F. Genome sequencing firmIlluminahas also cut estimates for 2023 mainly due to weaker demand and funding crunch for its customers amid the high interest rate environment. Consensus is expecting a weak 2023, and strong growth in 2024 and 2025.
Similarly, Thermo FisherandRevvity(previously PerkinElmer), both in the analytical and life sciences space, expect a weaker 2023, affected by weak demand and funding woes, and a recovery in 2024 and 2025. Similar trend was also observed forWaters Corporation, an analytical instrument manufacturer.
Philip Morris, on the other hand, has raised slightly the lower end of its 2023 guidance. Demand for the higher-margin IQOS devices has helped the group to protect margins. Sales for smoke-free products (including IQOS), which accounts for c.34% of total revenue, gained 24% y-o-y for 1H23, vs the 2.3% gain for combustible tobacco products.
In the semiconductor space,Lam Research, with key exposure to the memory chip space, is affected by the weakness in memory space, which was the first segment to turn negative last year. Looking forward, we expect the memory segment, which accounts for about one-third of the total semiconductor revenue for the industry, to lead the recovery.
Muted outlook for most other technology domains, especially thePC related and Printing segment, such asHP Inc.andIBM, as the consumer electronics segment has been hit by the weak demand. Going forward, the5G, wireless, equipment testing and infrastructuresegment could be another growth area for Venture, given the rising AI trend.
Beneficiary of China +1 strategy.Furthermore, the bulk of Venture’s manufacturing facilities is in Malaysia (Johor and Penang). The group is in a sweet spot to benefit from its customers’ diversification from China, especially companies such as Agilent Technologies, Waters Corporation, Philip Morris and HP Inc. that already have facilities in Malaysia. - Higher DPS on the cards?
Venture has consistently paid a DPS of at least 50 Scts per year since 2005. In recent years, DPS has been on an uptrend, increasing from 70Scts in 2018-2019 to 75 Scts from 2020. With its strong net cash position, we believe there is a possibility that Venture could increase its DPS once the outlook improves.
Venture’s net cash position has more than doubled over the past 10 years to S$896m as at end-2Q23, which could lead to a higher DPS as the group has raised DPS every few years in the last 10 years. Even at the current DPS of 75cts, the stock’s yield works out to an attractive 5.9%.
Upgrade to BUY, TP S$15.40based on c.13.5x on FY24F earnings. We believe the deep share price correction is unwarranted. With valuations at a trough level, we believe upside risk outweighs the downside, even though 2H23 results are still likely to be muted. Upgrade to BUY, with no change in earnings and TP of S$15.40.
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