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Brokers' take: Venture pops after slight earnings beat for Q4

VENTURE Corp shares surged S$1.13 or 7 per cent to S$17.25 on a volume of 2.36 million shares as at 10.52am on Monday, after it posted full-year results last week that were in line with lowered street expectations, while fourth-quarter earnings were a slight beat. 

Although Venture's core profit for the fourth quarter was lower year on year, it was up 33 per cent from the third quarter, helped by new product introductions, Maybank Kim Eng analyst Lai Gene Lih wrote in a report: "The sequential recovery may carry on for another one to two quarters."

He wrote: "Indicators are full-quarter contributions in the first quarter this year for products launched at various points in the last quarter, new product introductions in the first quarter and elevated inventory levels above S$800 million."

In 2018, Venture's inventory levels range from S$700-800 million, which largely comprise raw materials, Mr Lai explained: "We understand Venture only buys raw materials after receiving purchase orders from customers."

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The street also cheered Venture's margin expansion and higher dividends.

DBS analyst Carmen Tay wrote: "Net margin is a critical factor driving share price, which is currently well supported by changing business mix. According to our critical factor analysis, Venture’s net margins have a direct correlation with its share price."

Gross and net margins improved from 26.6 per cent and 9.8 per cent for the first quarter last year to 27.0 per cent and 11.9 per cent respectively in 2018, she noted.

Ms Tay added: "Venture's evolving business mix, with increasing contribution from the test, measurement, medical and life science segment, and declining contribution from computer peripherals and printing, is likely to improve its margins. We believe that the specialised nature of the Medical and Life Science segment permits Venture to realise better margins on contracts. Coupled by higher operational efficiencies, (it) should continue to drive margins higher ahead."

Citi analysts led by Patrick Yau wrote that the fourth quarter's net margin of 11.9 per cent represented the sixth consecutive quarter of net margins above 9 per cent, "attributable to strong value-add, judicious cost management and lower effective tax rate".

He wrote: "While management believes this new level of profitability is sustainable, it emphasised some fluctuations should be expected. Venture reiterated that the ultimate strategy is to expand revenue alongside margins."

Higher research and development (R&D) expenditure booked by the electronics manufacturing services (EMS) firm and expansion in Johor also implies growth plans, Citi noted, with R&D expenses (prototyping/non-recurring engineering) for the 2018 full-year 66 per cent higher at S$83 million, though fourth-quarter R&D expenses fell 21 per cent to S$15 million. 

Citi wrote: "We believe Venture has reconfigured itself (to work across seven technology domains) and has begun to reap success especially in the life sciences/genomics/molecular diagnostics/medical devices, wellness/lifestyle domains."