Singapore | Electronics Manufacturing Services

Asia Pacific Equity Research

VENTURE CORP | BUY MARKET CAP: USD 1.6B

2 Mar 2015 Company Update

AVG DAILY TURNOVER: USD 2M

GROWTH MOMENTUM TO SUSTAIN FY14 results within expectations Sustainable margins key for growth Raise FV; maintain BUY

• • •

BUY (maintain) Fair value

S$8.41

add: 12m dividend forecast

S$0.50

versus: Current price

S$8.12

12m total return forecast

Growth momentum continued into FY14 We continue to see steady growth for Venture Corp (VMS) as it reported a 3.5% YoY growth in its 4Q14 PATMI to S$39.3m on the back of an 8.3% increase in revenue to S$674.7m. For FY14, revenue rose 5.8% to S$2465.5m while PATMI improved 6.6% to S$139.8m. All product segments except for PC & Data Storage achieved top-line growth, with Test & Measurement/Medical & Life Science/Others (TMO) being the main growth driver as it recorded 22.8% YoY jump in revenue in FY14. VMS’ FY14 PBT margin was 0.3ppt higher at 6.3% while net margin was 5.7% (FY13: 5.6%). Net margin was impacted by the higher tax expense due to changes in tax incentives. Going forward, we expect tax rate to normalize at 10% each year, at least in the next two years. FY14 results came in within our expectations as revenue and PATMI formed 102.0% and 100.1% of our forecasts.

10%

Analysts Eugene Chua (Lead) ● +65 6531 9678 [email protected] Carey Wong ● +65 6531 9808 [email protected] Key information Market cap. (m)

S$2,234 / USD1,641

Avg daily turnover (m)

S$3 / USD2

Avg daily vol. (m)

0.4

52-wk range (S$)

7.15 - 8.3

Free float (%)

91.5

Shares o/s. (m)

275.1

Exchange

SGX

BBRG ticker

Expects steady growth with sustainable margins We believe VMS will continue its growth momentum even as management cautioned against the slowing Europe economy given the following factors: 1) VMS has a diversified customer base with more than 100 customers, which help reduces concentrated exposure to the European market; 2) strengthening of USD against SGD helps but note that effect is likely to be partially offset by higher costs in Asia (e.g. higher minimum wage) and weaker Euro against SGD; 3) we believe VMS is able to improve its margins by providing value-adding services such as more design and research works on new products for customers, and lastly; 4) broad-based revenue growth with TMO segment being the key driver going forward, and we also expect higher contributions from its life science customers to command higher margins as well.

VMS SP

Reuters ticker

VENM.SI

SGX code

V03 Information Technology

GICS Sector GICS Industry

EMS Aberdeen AM 21.9%

Top shareholder

1m

3m

12m

Company (%)

Relative total return

2

6

15

STI-adjusted (%)

2

4

2

Price performance chart

Raise FV; maintain BUY As we incorporate FY14 results, VMS’ outlook and introduce FY16 forecasts, we bump up our FY15 revenue projection by 1.7% while keeping our PATMI forecast largely unchanged as our previous assumption for PBT margin was slightly too optimistic. Rolling-forward our valuation to 15x FY15F P/E, we raise our FV from S$8.04 to S$8.41. Maintain BUY, supported by an attractive FY15F dividend yield of 6.2%. Sources: Bloomberg, OIR estimates

Key financial highlights Year Ended Dec 31 (S$m)

FY13

FY14

FY15F

FY16F

2,329.6

2,465.5

2,631.8

2,806.7

EBITDA

177.2

191.6

216.1

230.7

Operating Profit

135.3

150.3

166.3

181.9

PATMI

131.1

139.8

154.1

168.2

47.7

50.9

56.1

61.2

na

na

57.3

62.7

PER (x)

17.0

16.0

14.5

13.3

EV/EBITDA (x)

11.3

10.5

9.4

8.8

Dividend Yield (%)

6.2

6.2

6.2

6.2

ROE (%)

7.2

7.6

8.2

8.9

Revenue

EPS (S cents) Cons. EPS (S cents)

Industry-relative metrics

Note: Industry universe defined as companies under identical GICS classification listed on the same exchange. Sources: Bloomberg, OIR estimates

Please refer to important disclosures at the back of this document.

MCI (P) 004/06/2014

OCBC Investment Research Singapore Equities

Exhibit 1: Financial highlights

Revenue Gross profit Gross margin EBITDA EBITDA margin Depreciation & amortisation Operating profit Net interest Associate Pre-tax profit Pre-tax margin Tax Minority interest PATMI Net margin

4Q13

4Q14

% Chg

FY13

FY14

(S$m)

(S$m)

(YoY)

(S$m)

(S$m)

(YoY)

622.9 141.6 22.7% 49.9 8.0% -10.2 39.7 0.1 2.1 41.9 6.7% -4.0 -0.1 38.0 6.1%

674.7 153.6 22.8% 52.3 7.8% -10.4 41.9 0.3 2.3 44.5 6.6% -5.2 0.0 39.3 5.8%

8.3% 8.4% 0.1% 4.8% -3.3% 1.7% 5.6% 109.0% 10.1% 6.1% -2.0% 28.8% N.M. 3.5% -4.5%

2,329.6 536.6 23.0% 177.2 7.6% -41.9 135.3 0.3 4.4 139.9 6.0% -9.0 -0.2 131.1 5.6%

2,465.5 571.8 23.2% 191.6 7.8% -41.3 150.3 1.5 4.6 156.5 6.3% -16.6 0.0 139.8 5.7%

-71.0% -71.4% -1.2% -70.5% 1.9% -75.2% -69.0% -3.8% -46.6% -68.2% 9.8% -42.7% N.M. -70.0% 3.6%

Source: Company financials

Exhibit 2: VMS’ EBITDA and net margins trend

Source: Company, OIR

2

% Chg

OCBC Investment Research Singapore Equities

Company financial highlights

Income statement Year Ended Dec 31 (S$m)

FY13

FY14

FY15F

FY16F

2,329.6 177.2 -41.9 135.3 0.3 4.4 139.9 -9.0 -0.2 131.1

2,465.5 191.6 -41.3 150.3 1.5 4.6 156.5 -16.6 0.0 139.8

2,631.8 216.1 -49.8 166.3 1.0 3.9 171.2 -17.1 0.0 154.1

2,806.7 230.7 -48.8 181.9 0.8 4.2 186.9 -18.7 0.0 168.2

FY13

FY14

FY15F

FY16F

390.9 1,089.9 152.6 808.4 2,441.8 440.8 161.8 612.5 1,826.8 2,441.8

393.3 1,166.0 187.7 781.2 2,528.2 488.2 169.0 663.4 1,862.3 2,528.2

366.7 1,235.3 187.9 785.2 2,575.1 518.3 169.0 693.5 1,879.0 2,575.1

375.5 1,305.3 169.1 789.4 2,639.2 551.6 169.0 726.8 1,909.9 2,639.2

Cash flow statement Year Ended Dec 31 (S$m)

FY13

FY14

FY15F

FY16F

Profit Before Tax Working Capital Changes Net Cash from Operations Capex Investing Cash flow Net Debt Change Financing Cash Flow Net Cash Flow Beginning Cash Balance Ending Cash Balance

139.9 -61.4 106.5 -34.9 -34.2 -11.2 -145.0 -72.7 453.4 390.9

156.5 -10.5 167.9 -56.7 -37.2 1.7 -135.5 -4.7 390.9 393.3

171.2 -39.2 158.4 -50.0 -47.6 0.0 -137.4 -26.6 393.3 366.7

186.9 -36.7 174.0 -30.0 -27.8 0.0 -137.4 8.8 366.7 375.5

FY13

FY14

FY15F

FY16F

47.7 409.9 17.0 2.0 11.3 6.2 5.4 7.2 Net Cash -2.7

50.9 429.9 16.0 1.9 10.5 6.2 5.6 7.6 Net Cash 2.4

56.1 436.0 14.5 1.9 9.4 6.2 6.0 8.2 Net Cash 1.4

61.2 447.2 13.3 1.8 8.8 6.2 6.5 8.9 Net Cash 1.4

Revenue EBITDA Depreciation & Amortisation Operating Profit Net Interest Associates Pre-tax Profit Tax Non-controlling Interest PATMI

Balance sheet As at Dec 31 (S$m) Cash Other Current Assets Property, Plant & Equipment Other Non-current Assets Total Assets Current Liabilities less Debt Total Debt Total Liabilities Shareholders Equity Total Equity and Liabilities

Key rates & ratios EPS (S cents) NTA/share (S cents) PER (x) Price/NTA (x) EV/EBITDA (x) Dividend Yield (%) ROA (%) ROE (%) Net Gearing (%) PE to Growth (x) Sources: Company, OIR forecasts

Company financial highlights

OCBC Investment Research Singapore Equities

SHAREHOLDING DECLARATION: The analyst/analysts who wrote this report holds/hold NIL shares in the above security.

DISCLAIMER FOR RESEARCH REPORT This report is solely for information and general circulation only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without our written consent. This report should not be construed as an offer or solicitation for the subscription, purchase or sale of the securities mentioned herein. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities. OCBC Investment Research Pte Ltd, OCBC Securities Pte Ltd and their respective connected and associated corporations together with their respective directors and officers may have or take positions in the securities mentioned in this report and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally. Privileged / confidential information may be contained in this document. If you are not the addressee indicated in this document (or responsible for delivery of this message to such person), you may not copy or deliver this message to anyone. Opinions, conclusions and other information in this document that do not relate to the official business of OCBC Investment Research Pte Ltd, OCBC Securities Pte Ltd and their respective connected and associated corporations shall not be understood as neither given nor endorsed.

RATINGS AND RECOMMENDATIONS: - OCBC Investment Research’s (OIR) technical comments and recommendations are short-term and trading oriented. - OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month investment horizon. - As a guide, OIR’s BUY rating indicates a total return in excess of 10% based on the current price; a HOLD rating indicates total returns within +10% and -5%; a SELL rating indicates total returns less than -5%.

Co.Reg.no.: 198301152E Carmen Lee Head of Research For OCBC Investment Research Pte Ltd

Published by OCBC Investment Research Pte Ltd

Important disclosures

Output file

Mar 2, 2015 - FY15F. FY16F. Profit Before Tax. 139.9. 156.5. 171.2. 186.9. Working Capital Changes. -61.4. -10.5. -39.2. -36.7. Net Cash from Operations.

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