1H22: Results Slightly Above Expectations; Demand Remains Resilient
VMS’ 1H22 earnings of S$174m (+24% yoy) exceeded our expectation by 3%. All of its seven domains recorded growth due to strong customer demand aided by VMS’ ability to overcome supply-side challenges including supply chain constraints and the tight labour situation. The company anticipates demand to remain resilient in 2H22 across various technology domains and expects to end the year well. We raise our 2022 EPS and target price by 3% to S$23.54. Maintain BUY.
RESULTS
• Results above expectations due to growth across all seven domains and continued ability to overcome supply-side challenges. Venture Corporation’s (VMS) 1H22 earnings of S$174m (+24% yoy) exceeded our expectation by 3%. The strong growth was due to growth across all the domains and its ability to overcome supply-side challenges including global supply chain constraints, rising inflationary pressures and a tight labour situation. Net margin remained stable at 9.7%, which is a testament of VMS’ differentiating capabilities and pricing power.
• Anticipates a resilient demand outlook. Overall, VMS expects to end 2022 well. Based on its customers’ orders and forecasts, it expects demand to remain unabated in 2H22. VMS 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.
• Proactive management and differentiating capabilities help VMS to stand out. Several initiatives undertaken by VMS to overcome supply chain disruptions include: a) redesigning the products to reduce dependency on parts that are in shortages, b) working with customers to obtain a longer order forecast for better procurement and production planning, and c) increasing stockpiling of inventories and sharing the working capital burden with customers. Combined with the strong design and R&D capabilities of VMS, the company is able to provide unique solutions to win market share and clients that are of high quality amid this uncertain environment.
STOCK IMPACT
• Remains positive on its long-term growth as it continues to engage and collaborate with successful and innovative customers in various high-growth, fast expanding market segments.
• Maintains a sharp focus on its business sustainability goals and strategic direction over the long term. With planned investments into the expansion of its human capital, development of new differentiating technologies and capabilities, and new manufacturing capacity, VMS will be focusing on the execution of its transformational journey to propel the group’s network of Clusters of Excellence to the next level.
• Strong balance sheet and good dividends provide limited share price downside. As of 1H22, VMS recorded net cash of S$704m (accounting for about 15% of its current market cap) and led the pack of US-listed peers which were mostly in net debt positions. More importantly, VMS has consistently paid the same amount of dividends or better than that in the preceding years.
• Positive guidance of key customers:
NCR: 2022 guidance of 12-15% yoy revenue growth and 27-39% yoy EPS growth.
Agilent: 2022 guidance of 7% yoy revenue and EPS growth.
Fortive: Expects 2022 revenue growth of 7% yoy.
Keysight: Expects 2022 revenue growth of 5% yoy.
Illumina: Expects 2022 revenue growth of 14-16% yoy.
Waters: Expects 2022 revenue growth of 6% yoy.
Philip Morris: Expects 2022 revenue growth of 4-6% yoy and EPS growth of 8-11% yoy.
EARNINGS REVISION/RISK
• We raised our 2022/23/24 revenue by 5%/3%/3% to account for the better-than-expected revenue in 1H22 and VMS’ guidance for a resilient customers’ demand for 2H22. We expect 2H22 revenue to be largely similar to 1H22. As a result, our 2022/23/24 earnings increased by 3%/1%/1%. We are expecting a mild reduction of margin by 0.2ppt in 2022 as we increased our tax rate assumption by 2ppt to 15% from 2023-24 to reflect lower government tax incentives.
VALUATION/RECOMMENDATION
• Maintain BUY and raised our target price by 3% to S$23.54, pegged to +1SD above its forward mean PE, of 19.5x on 2022 earnings. Currently, VMS offers an attractive dividend yield of 4.7%.