During the 1QFY2023, VMS reported a softer demand and a weak customer outlook, with most domains in decline. The pattern in 2QFY2023 looks to continue as overall customer demand remains weak, the analyst adds.
Meanwhile, US GDP growth based on consensus expectation in 2Q2023 is only up 2% from 1.8% in the previous quarter, with S&P 500’s earnings per share for 2Q2023 of US$53.51 is 2% lower q-o-q and 1% lower y-o-y. These headwinds of muted demand from large international clients largely look to persist.
To reflect the weakened demand, Yeo has lowered his revenue forecasts by 8% whilst maintaining margin assumptions.
“We do not expect margins to be under significant pressure as customer programmes remain largely high value with minimal change in profitability,” he writes.
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In tandem with his lowered revenue estimates, Yeo has also cut his earnings expectations by 8% overall.
“While FY2023 earnings decline is now 12% y-o-y, we still expect net profit to grow 5% y-o-y in each of FY2024 - FY2025. Our target price is correspondingly reduced by 6% from $19.40 as we roll over our earnings base from 16x FY2023 P/E to blended FY2023 - FY2024 P/E,” he notes.
Despite the reduced earnings estimates, the global economic recovery and compelling valuations are encouraging signs for the analyst to keep his “buy” call. The US and global growth are expected to recover by summer 2023, with the US housing market already recovering and US inventories-to-shipment ratios also stabilising.
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The US consumer market is likely to remain resilient in 2H2023 as labour market conditions remain well-supported and household balance sheets remain strong. In addition, robust wealth effects from rising US stocks and residential housing prices will offset potential declines in household savings rates.
“We like VMS for its superior margins, net cash position ($2.78 per share), attractive dividend yield, muted valuation (at -1 s.d. of its historical mean), and strategy of offering differentiating and high-value solutions to customers,” explains Yeo.
Downside risks facing the analyst include a softer or late global recovery, as well as decelerating global demand.
As at 11.35 am, Venture Corp shares changed hands at $14.53, down 0.48%.
