9M23: Results Miss Expectations; Upgrade To BUY On More Compelling Valuation
VMS’ 3Q23 earnings of S$63m (-35% yoy /-5% qoq) missed our expectation by 7%, with 9M23 accounting for 72% of our full-year estimate. 9M23 revenue fell 19% yoy due to soft customer demand and ongoing inventory destocking. However, VMS will continue to strengthen its relationship with customers to secure growth in market share and roll out new products. We trim our 2023-24 earnings by 4-5%. Our target price fell 4% to S$14.06. Upgrade to BUY as valuation has turned more compelling.
RESULTS
• Results below expectations due to soft customer demand and ongoing inventory destocking. Venture Corporation’s (VMS) 3Q23 earnings of S$63m (-35% yoy /-5% qoq) missed our estimate by 7%. 9M23 earnings of S$203m (-25% yoy) accounted for only 72% of our full-year estimate. Revenue fell 19% yoy in 9M23 against a high base last year due to demand softening across the majority of its technology domains and customers’ inventory destocking. 9M23 net margin fell 0.7ppt to 8.9%, mainly due to lower operating leverage as revenue declined. VMS is looking to maintain cost efficiency and right size its workforce without having to restructure.
• Expect easing decline of revenue. VMS expects the extent of decline in demand from customers to ease as inventory destocking is entering the final stages. Also, VMS is hopeful that new product launches from customer and more relocation of manufacturing activities to ASEAN could improve demand for its manufacturing facilities.
• VMS will continue to strengthen the relationships with its customers and other business partners that it has forged over many years. It will deepen its strategic collaboration with customers, working with them to secure growth in market share. New product introductions (NPI) with both existing and new customers are on track to be rolled out next year. The adoption of VMS module solutions by its life science and industrial customers is also picking up pace, which will complement its core EMS++ business going forward.
STOCK IMPACT
• VMS intends to expand its participation in new high-growth technology domains. VMS will continue to capitalise on its core strengths of excellence and innovation to deliver long term sustainable growth and greater value for its shareholders.
• Healthy balance sheet and consistent dividends. As of end-3Q23, VMS had net cash of S$957m (accounting for around 27% of its current market cap) and led the pack of US-listed peers which were mostly in net debt positions. Also, VMS continues to issue the same amount of dividends or better than that of preceding years.
EARNINGS REVISION/RISK
• We cut our 2023/24/25 revenue estimates by 7%/7%/7% to account for the near-term demand weakness of VMS’ customers and the more challenging macro environment. As a result, our 2023/24/25 earnings estimates fell by 5%/4%/4% respectively.
VALUATION/RECOMMENDATION
• Upgrade to BUY with a 4% lower target price of S$14.06, pegged to its long-term forward mean PE of 14.6x 2024F earnings. We upgrade the stock to BUY as we think that VMS’ share price correction of about 30% ytd has made its valuation more compelling. Currently, VMS is trading at 12.6x 2024F PE (9.2x ex-cash 2024 PE), that is around 0.5SD below its long-term PE mean and offers a decent dividend yield of 6.2%.
