Brokers' take: UOBKH maintains 'buy' on Venture, flags potential risks for 2021

UOB Kay Hian (UOBKH) said it expects Venture Corp's impending Q4 results to reflect a sequential growth despite declining year on year, driven by factors including the reopening of economies and strong demand for customers' essential products.

The research house has maintained its "buy" call on the electronics manufacturing services firm with a price-to-earnings (P/E) based target price of S$23.76. Based on the share price of S$19.48, Venture's price target is pegged to plus-one standard deviation above its forward mean P/E of 19.4 times on projected FY2021 earnings.

In a report on Thursday, analyst John Cheong estimated Venture to pay out a dividend of 75 Singapore cents per share this year, which translates into a dividend yield of 3.9 per cent.

"As of end-H1 2020, Venture recorded net cash of S$831 million and led the pack of US-listed peers which were mostly in net debt positions. More importantly, Venture has consistently paid the same amount of dividends or better than in the preceding year," said the analyst.

In addition to its strong balance sheet, this will help to limit the group's risk of a share price downside, in his view.

However, Mr Chong sees three potential key risks for the stock this year.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

One would be the possible delay of new product launches into the later part of the year should market sentiment weaken - especially in the US and European Union, which are key markets of Venture's clients.

The analyst also highlighted a risk of disruption to Venture's production capacity in the event of a resurgence in Covid-19 cases in Malaysia, where the group's manufacturing operations are based.

"The Malaysian government ordered all foreign workers to undergo mandatory Covid-19 screening starting Jan 1, 2021, including the manufacturing sector. Should Venture employees test positive, it could lead to a temporary disruption to operations or capacity cuts at its factories. Venture's presence in Malaysia, which includes Johor and Penang, form 81 per cent of Venture's total site area," he observed.

Lastly, Mr Chong believes there is a risk of reduced demand for essential products linked to the pandemic if a global recovery kick-starts this year.

He noted in his report that several of Venture's clients have benefited from the surge in demand for essential products due to Covid-19. For instance, Thermo Fisher's top line for FY2020 grew 26 per cent from the year before, its growth mainly driven by Covid-19 related testing equipment.

"From its 2021 revenue forecast of 9 per cent, Thermo Fisher expects Covid-19 related testing to contribute 2 per cent growth, while the base business contributes the remaining 7 per cent," said Mr Chong.

Venture is due to report its financial results for FY2020 ended December on Friday.

Shares in Venture closed at S$19.70 on Thursday, up 22 cents or 1.1 per cent.