Broker's take: Maybank KE downgrades Venture to 'hold' as chip shortage persists

TEMPERING recovery expectations have led Maybank Kim Eng (Maybank KE) to downgrade its call on Venture Corporation V03 to "hold" from "buy" while slashing its target price estimate to S$19.18 from S$25.13.

The new target price represents 17.3 times FY2022 earnings estimates, or 0.55 standard deviation points above the stock's 17-year mean, versus 18.5 times previously.

In a report on Friday (Nov 5), analyst Lai Gene Lih said he expects the ongoing global component shortage to persist in FY2022, and hence limit the pace of Venture's anticipated earnings recovery.

This has prompted Lai to cut his FY2021 to FY2023 earnings per share (EPS) estimates by 9 to 18 per cent. He is now projecting forward EPS of S$1.02, S$1.11 and S$1.21 versus S$1.13, S$1.36 and S$1.46, respectively.

Commenting on the group's latest set of Q3 FY2021 financials, Lai noted that revenue fell year on year due to sporadic lockdowns in South-east Asia, which was further exacerbated by the shortage of critical chips.

Lai nonetheless continues to like Venture as he believes the group's margins remain industry-leading, with a diverse base of mainly blue-chip customers as well as its net cash position since 2008.

"Net margin was sustained y-o-y and q-o-q at 10 per cent (in Q3 FY2021). This is respectable and suggests that Venture has been successful in passing costs along to customers thus far," he added.

With Venture's high vaccination rates of 96 per cent and 92 per cent for its Malaysia and global sites, respectively, the analyst thinks some production bottlenecks on the supply side will be reduced going forward.

However, he maintains that the availability of parts and components will remain an impediment to manufacturers globally.

Other downside risks include the worsening of supply bottlenecks, margin contraction due to inflation, and diminishing demand should Venture's customers adjust their orders or forecasts downward.

"We believe our fair value considers both optimistic demand commentary as well as supply side bottlenecks and risks. With aforementioned risks, we struggle to sustain our 'buy' rating on Venture, and prefer exposure to AEM Holdings for Singapore tech," said Lai.

As at 11.24 am on Nov 5, shares of Venture were trading S$0.27 or 1.4 per cent lower at S$18.68.