Why Venture's share price might climb higher

VENTURE Corp seems to have come through the worst of the Covid-19 pandemic unscathed.

Its shares hit an intraday 52-week high just over a week ago, and are now 20 per cent higher than they were at the beginning of this year.

Yet, there could well be further upside in the months ahead.

As companies around the world gradually learn to cope with the virus, Venture is likely to see stronger revenues and earnings as it fulfils a backlog of orders, rolls out additional products and continues pushing into new fast-growing fields.

For H1 2020 Venture reported a 28.2 per cent fall in net profit to S$130.5 million, on a 25.5 per cent year-on-year decline in revenue to S$1,365.7 million. But the company noted that its business was rebounding swiftly by May and June.

Revenue for Q2 2020 came in at S$692.7 million, up 2.9 per cent versus the S$673 million it chalked up for Q1 2020. Net profit for Q2 2020 was S$70.2 million, an even stronger 16.3 per cent rise against its Q1 2020 net profit of S$60.3 million, which the company attributed to a higher-margin product mix.

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Venture declared an interim dividend of S$0.25 per share when it published its H1 2020 results. For 2019, the company declared an interim dividend of S$0.20 per share and a final dividend of S$0.50 per share.

Now, some analysts are turning more positive on Venture's shares despite the strong rise they have already charted. In a research note on Oct 21, RHB upgraded its recommendation on the stock to "buy" from "neutral" and raised its target price by 9 per cent to S$22.60.

RHB is forecasting a 16.1 per cent decline in Venture's earnings for 2020 to S$306 million (S$1.06 per share), but a 12 per cent improvement in 2021 to S$343 million (S$1.19 per share). At their close of S$19.45 on Monday, Venture's shares are trading 18.3 times and 16.3 times these forecast earnings.

Overshooting share price

Yet, investors should keep in mind that Venture reveals very little about its customers and the precise nature of the business it does with each of them. Consequently, the market has been known to underestimate and then overestimate shifts in its profitability, leading to its share price overshooting on the upside as well as the downside.

For instance, at the beginning of 2017, when Venture was on the brink of a banner year, its shares were trading at less than S$10.

The company would eventually report a doubling of earnings for the year to S$361.5 million on a more than 39.3 per cent rise in revenue to S$4,004.5 million. It also hiked its total dividend for 2017 to S$0.60 per share from S$0.50 the previous year.

Venture's share price reacted positively to the company's strong quarterly reports during the year, as well as disclosures of share purchases by its chairman and CEO Wong Ngit Liong. In April 2018, the stock hit a high of more than S$28.80.

Things began to unravel at that point though. An anonymous report emerged claiming that Venture's revenues had become heavily dependent on Philip Morris International's e-cigarette product, which was suffering weak sales.

With Venture having advanced so much in the preceding months, and the market lacking the information to judge the veracity of the anonymous report's claims, the stock immediately went into a tailspin.

Despite pressure from investors, Venture steadfastly refused to disclose any information about its dealings with Philip Morris International.

"It is well known that our industry faces intense competition. It is therefore comprehensible that Venture, having built a robust business model, keeps its 'trade secrets' very close to its heart. This is done for the benefit of all stakeholders including shareholders of the company," Venture said, in a statement in May 2018.

This did Venture's share price no favours. The stock kept falling through the rest of 2018, eventually hitting S$13.73 at the end of the year.

With hindsight, this was an overreaction. Venture reported earnings of S$370.1 million for 2018, and S$363.1 million for 2019. While these earnings were flat versus 2017, they were still more than twice what Venture had achieved in 2016.

Venture also hiked its total dividend to S$0.70 per share for 2018 and 2019.

New growth drivers?

Now, as the uncertainty and lack of visibility caused by Covid-19 clear up, Venture might once more be on the cusp of an upturn in profitability that lifts its stock price by more than many analysts and market watchers expect.

Beyond addressing the backlog of orders accumulated during the lockdowns and restrictions on movement earlier this year, Venture has continued pushing into sectors with exciting potential, which could develop into new sources of revenue in the quarters ahead.

Back in 2001, almost all its revenue came from providing electronic manufacturing services to companies in the printing and imaging, computer peripherals, and networking communications sectors.

Two decades on, Venture has also developed expertise in, among other things, handheld interactive scanning and computing products, advanced storage systems and devices, test and measurement equipment and instrumentation, medical and healthcare devices and life science equipment.

Venture said in its latest annual report that it is collaborating with partners in the life science and genomics ecosystem on the development of analytical tools for biomedical research, in the specialised fields of oncology and immunology.

Venture added that it provided critical support to one of its partners during the Covid-19 outbreak for their diagnostic instruments deployed at the frontline. It added that it sees "deep value creation opportunities in this ecosystem, with the heightened interest in areas such as precision medicine, non-invasive prenatal testing, healthy longevity, as well as healthcare and wellness".

Elsewhere, Venture is closely monitoring developments in the areas of 5G, robotic process automation and artificial intelligence.

Beneficiary of US-China tension

Venture is also a likely beneficiary of trade tensions between the US and China that are widely expected to continue regardless of who wins the US presidential election this week.

Venture has approximately 86 per cent of its production in Southeast Asia, specifically Malaysia, according to a report last year by Phillip Capital.

"From our discussion with manufacturers and analysis of various announcements, there is an ongoing shift of the electronics supply chain from China into South-east Asia," noted Phillip Capital, in the report.

"We were also able to observe that the investment approvals in Malaysia for electrical and electronic products have (seen) a massive spike recently," the report added.

Takeover target?

Finally, shareholders of Venture might one day benefit from a takeover offer for the company - perhaps from a private equity fund.

Venture's chairman and CEO Wong, 79, remains the company's driving force today, with no obvious heir-apparent. At some point, he is likely to be prodded by his advancing age to consider the long-term future of the company.

Venture employs some 12,000 people around the world, and has more than 9,400 shareholders.

Mr Wong himself only owns 7.01 per cent of Venture, according to the company's last annual report. Venture's other substantial shareholders include fund management firms BlackRock and Schroders, with stakes of 5.13 per cent and 6.99 per cent, respectively.

As at June 30, Venture had a net cash position of S$833 million, which is equivalent to nearly 15 per cent of its current capitalisation of S$5.64 billion.