Singapore’s manufacturing sector surprised yet again in March. According to the data released by the Singapore Economic Development Board on 26 April 2017, Singapore’s manufacturing output in March 2017 rose 10.2 percent year-on-year (y-o-y), or five percent when compared to the previous month. The surge was mainly attributable to a 37.7 percent jump in the electronics cluster’s output, primarily driven by the semiconductors segment which registered a 54.6 percent growth. This came after the remarkable 39.8 percent and 63.6 percent expansion for electronics output and semiconductors segment respectively reported in February, and effectively reversed the trend of total manufacturing output’s month-on-month sequential contractions seen in January and February.
Underpinned by the robust growth in the electronics sector, companies like Venture Corporation (Venture) could be well-positioned to capitalise on this trend. Established in 1984 as a technology products design and development solution provider in the electronics manufacturing services (EMS) business, Venture has since grown to become a reliable partner well-recognised for its capabilities in Original Design Manufacturing (ODM) as well as a range of high-mix, high-value and complex products. This issue, we will take a closer examination of Venture’s potential for further growth.
Fourth Successive Year of Revenue Growth
Although Venture’s business in 2011 and 2012 were affected by US economic weakness as well as mergers and acquisitions activities among its clients, situations took a turn for the better from 2014 onwards as the US economy improved.
In its latest FY16 report, Venture registered an 8.2 percent increase in revenue to $2.9 billion mainly attributable to strong execution of its customers’ programmes and projects, marking the fourth consecutive year the group has achieved revenue growth. Likewise, net profit rose 17.3 percent to $180.7 million. Looking at a four-year historical period from FY12 to FY16, revenue and net profit both expanded at a compounded annual growth rate of 4.8 percent and 6.6 percent respectively.
It is noteworthy that Venture’s strategy to focus on high value-added segments which can command a higher margin has paid off well. The group’s test and measurement/medical and life science/others segment which accounted for 34.1 percent of its FY15 revenue, has grown to contribute 43.3 percent of its revenue in FY16.
Coupled with the group’s continued efforts to improve operational efficiency and better cost control management, Venture’s net profit margin has been raised by 0.5 percentage points from 5.8 percent in FY15 to 6.3 percent in FY16. In addition, Venture’s innovations and technical capabilities would also help to differentiate itself from its competitors and create a strong competitive advantage.
Strong Financials And Sustainable Dividends
We like it that Venture’s balance sheet and cash flow have always been strong. As at 31 March 2017, the group’s cash and bank balances stood at $486.8 million, and only has bank loans of $87.2 million. This translates to a net cash position of $399.6 million, which is equivalent to around 11 percent of its current market capitalisation. Moreover, the group has been able to generate positive cash flows from its operations for the last five years.
Venture has been consistently paying out dividends of $0.50 per share every year without fail for the past 12 years since 2005. Given the company’s strong cash flow and balance sheet, we believe Venture has the capability to continue to do so in the foreseeable future. At current market price of $12.98 as at 8 May 2017, this translates to a decent dividend yield of 3.9 percent making it one of the established blue chips on the Singapore Exchange offering a reasonable and stable dividend income.
Strong First Quarter
Historically, the first quarter is usually Venture’s weaker quarter in part due to plant shutdown during the Chinese New Year seasons. However, the group’s delivery of an exceptional 1Q17 results far exceeded the expectations of many, further demonstrating Venture’s strong growth momentum tendency to continue for the rest of the year.
For 1Q17, Venture registered a 33.7 percent rise in revenue to $843.1 million, contributed by the group’s diversified customer base as well as new product and programme introduction by several customers. Likewise, net profit jumped 35.5 percent to $48.6 million in line with the higher revenue. In addition, value creation as well as improvement in operational excellence also played a part in driving the increased profitability.
Further Upside Potential
Venture’s shares are currently trading at a price-to-earnings ratio of 18.7 times and a price-to-book ratio of 1.8 times. Despite the share price having surged from $9.88 since 3 January 2017 to chalk up an attractive 31.4 percent return to date, an average target price of $13.39 from six brokerage firms still implies a further potential upside of another 3.2 percent. Already given a good head start with its 1Q17 results, Venture looks poised to ride on the strong momentum in FY17.