SINGAPORE (June 12): The ongoing US-China trade war has clouded the earnings outlook for local technology stocks.
Despite this, Maybank Kim Eng is upgrading its call on Venture Corporation to “buy” from “hold” previously with an unchanged target price of $19.74.
Since late-April, shares in Venture have dropped about 18% amid a broad sector sell-off, creating an entry point.
In a Monday report, analyst Lai Gene Lih says, “We believe investors seeking improved clarity before entry should wait for 2Q19 results in late-Jul/early-Aug, as we expect Venture to clarify: potential impact if the Huawei ban takes effect; whether NPIs will proceed as scheduled; and overall outlook of its broad base of >100 active customers.”
The analyst assumes a downside scenario for the group in FY19 with an 8%/17% cut in revenue/core PATMI, which will then lead to a ROE/COE fair value of $16.43, representing 1.9 times FY19 book.
FY19 scenario assumptions include earnings volatility due to customers’ product transitions; delay in new product introductions (NPIs) in 2H19 across multiple customers; revenue decline from customers’ exposure to Huawei; demand weakness from a deterioration in global capex appetite; and pricing and cost pressures.
However, Lai finds this unlikely as the group’s y-o-y growth from new customers have won interests in past years; margin sustainability from strong value-add with customers and astute cost management; and Venture has not observed signs NPIs will be delayed.
“Once the earnings volatility passes, we expect a resumption of growth from wallet expansion with existing customers and contributions from new ones. Venture has had a good record of delivering both,” says Lai.
The group also notes that the trade war has been a catalyst for customer wins and that these could contribute more meaningfully in the next one to two years.
Nonetheless, despite earnings volatility, the analyst favours Venture due to its more secure long term prospects from resumption of growth from a broad base of >100 customers; and its ability to sustain about 10% net margin from increased value-add with customers.
As at 11.50am, shares in Venture are trading 2.05% higher at $16.44 or 1.8 times FY19 book with a dividend yield of 4.5%.
