Margins defended despite cost pressures
- 1H22 revenue/net profit was 8.5%/7.7% above our expectation. 1H22 revenue increased 25.4% yoy as the global economy reopened.
- Despite cost pressures, pre-tax margin was 11.8% in 1H22, better than 11.3% in 1H21. NPM was 9.7% in 1H22 (tax impact) versus 9.8% in 1H21.
- We raise our FY22F EPS by 0.5% to reflect the continued customer demand. Our TP remains at S$23.32. Reiterate Add.
1H22 results: above expectation
1H22 revenue rose 25.4% yoy to S$1,796.1m with all business segments registering yoy growth. 2Q22 revenue grew 21.6% yoy to S$906.8m. 1H22 revenue was 8.5% above our expectation. 1H22 net profit increased 24.1% yoy while 2Q22 net profit rose 20.2% yoy. 1H22 core net profit of S$174.3m was 7.7% above our forecast of S$161.8m. Pre-tax margin was 12.2% in 2Q22 vs. 11.6% in 2Q21 and 11.5% in 1Q22 while net profit margin (NPM) was 10.0% in 2Q22 compared to 10.1% in 2Q21 and 9.5% in 1Q22. Cost pressure was evident with gross material profit margin erosion to 25.1% in 1H22 vs. 26.4% in 1H22 and the 26.4% yoy increase in other operating expenses. Aiding the better pre-tax margin in 1H22 was a) a 13.3% yoy decline in depreciation expenses (as some machinery were fully depreciated), and b) a 25.4% yoy decline in R&D expenses. Net profit margin was lowered by a higher tax rate of 18.0% in 1H22 vs. 13.2% in 1H21 (Venture had earlier guided for a tax rate of 18.0%).
2H22 outlook: demand remains strong
Based on customer order patterns, Venture expects demand to remain unabated in 2H22F. The group sees resilient demand across its diversified customer base, especially in the Life Science Genomics, Healthcare Wellness, Networking Communications, Test Measurement Instrumentation and Process Test equipment in the semiconductor technology domains. Challenges continue to stem from the global supply chain constraints (including component tightness though there has been an improvement in the situation), rising inflationary pressures and a tight labour situation. Management will look into improving its operating cash flow which was temporarily affected by the need for a higher inventory balance given string customer orders and the component shortage.
Recommendation: reiterate Add with a TP of S$23.32
With the better 1H22 performance, our FY22-24F revenue forecasts are raised by 3.9- 8.5%. We also raise our tax rate assumption to 18.0% (previously 14.0%). Hence, we lift our FY22-23F EPS forecasts by 0.01-0.50%. Our TP of S$23.32 is based on 17.3x FY23F P/E (0.5 s.d. above its 20-year average of 15.1x). Re-rating catalysts are new product launches by customers and improvements in component availability. The key downside risks are the ongoing supply chain disruptions, which affect the availability of parts and components, labour shortages and global economic outlook.