Analysts have become more positive about Venture Corp after the release of its 1QFY2022 business update ended March on April 29.
PhillipCapital’s Paul Chew has upgraded its rating from an “accumulate” to a “buy” on the stock, although with an unchanged target price of $22.
DBS Ling Lee Keng has maintained her “buy” call, but has raised her target price to $22.70, up from $22.60.
Meanwhile, RHB’s Jarick Seet has maintained his “buy” call and target price of $22.80 on the stock.
Chew explains his upgrade by pointing out that Venture’s 1QFY2022 profit after tax (PAT) rose 28% y-o-y to $84million, beating his estimates by 10%.
He added this figure was the second-highest March quarter for Venture, and the PAT for 1QFY2022 alone was 23% of his FY2022 forecast.
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Chew notes that Venture has “coped well” with supply chain challenges through a strong balance sheet to bulk up on inventories and re-design of products with new components.
This has led to revenue momentum picking up since 4QFY2021, with Chew noting that revenue is recovering to pre-pandemic levels as factory closures and supply chain disruptions over the past two years start to ease.
However, the spike in inventories meant that inventory costs spiked almost 70% y-o-y to $1.1 billion.
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Chew says that to support customer orders, Venture needs to hold inventories of semiconductors, materials and other components, adding “it is a near-term drag on working capital.”
Both receivables and inventory are up $680 million y-o-y, and additional working capital of $370 million was needed to fund the $283 million increase in revenue over the past 12 months. As such, net cash dropped to $815 million from $989 million a year ago.
Moving forward, Chew expects an “upbeat” outlook for Venture, with customers committing to six to 12 months of visibility.
“We also believe new products, especially life science, are gaining more traction. Despite the earnings beat, we maintain our FY2022 PATMI forecast, [although with] a buffer as the slowing macro environment remains a concern.”
Nevertheless, growth is broad-based across six of their seven key industries, and he expects a rebound from last year’s factory shutdown in Malaysia.
DBS’ Ling also notes the “broad-based growth” for Venture as a result of the sustained growth momentum from 4QFY2021.
“We expect the strong momentum to continue in the next few quarters, barring any worsening of lockdowns, especially in China,” she says
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Ling projects revenue to reach the pre-pandemic level of $3.6 billion but net margins to be lower, at 9.5%- 9.6%, due to supply chain disruptions, inflationary pressure, and a higher tax rate.
Nevertheless, she does still expect an 11% growth in net profit for the company in FY2022 and 7% in FY2023.
More importantly, she sees that Venture has strong financials to support its dividends. “A strong net cash position of $815.1 million as of end-March 2022 with no debt would support at least a repeat of the 75 cents distribution per share (DPS) in FY2022, which works out to an attractive yield of about 4%.”
Finally, RHB’s Jarick Seet calls the 1Q results “superb” and says that the company is on track for a positive FY2022.
“With strong demand across the majority of its domains, we expect margins to remain strong,” Seet says.
However, he warns that key component shortages may continue to hamper Venture’s ability to complete these orders.
Nevertheless, as Venture was able to deliver a strong 1QFY2022 despite such shortages, he remains confident of Venture enjoying a strong rebound, while component shortages should also begin to ease through the course of 2022.
Seet also highlights that Venture has also shown that it is able to maintain its margins despite this inflationary period, which highlights the strong relationships it has with its customers.
As at 12.43pm, shares of Venture Corp were trading at $17.42, with an FY2022 P/B ratio of 1.8 and dividend yield of 4.4%, according to RHB’s estimates.
