Venture snaps back as 'true Valiant' confronts short-sellers

Singapore

THE value chain intrigue at Venture Corp deepens, with some non-traditional sources framing the debate most fiercely inside the information void created by Venture's firm refusal to give the market even the slightest glimpse into its top-secret customer relationships.

The shares gapped up at the open, closing a full S$1.05 or 5.36 per cent higher at S$20.65 as the bulls finally pulled off a short squeeze after two weeks of panic-selling.

Over the weekend, an online report from an anonymous writer offered an impassioned defence of Venture, arguing that it deserves to trade at a higher price-to-earnings ratio than other electronics manufacturing services (EMS) peers such as Hon Hai, given that Venture's margins are top-of-the-class owing to its more diversified customer base.

Venture shares had crashed 32 per cent over the previous 10 sessions, first on news that a smokeless tobacco device that it makes for Philip Morris was not selling out as quickly as hoped for in Japan.

On April 24, the first anonymous online report surfaced, claiming that Venture derived a whopping 30 per cent of revenue from Philip Morris in 2017. On April 25, Venture reported first quarter earnings that trailed street expectations by 6-8 per cent, exactly as the report's writers, the "Valiant Varriors", had predicted.

With Venture keeping to its oath of EMS omerta and no sell-side analyst stepping up to refute the Valiant Varriors report directly, the masked writer of the weekend rebuttal signed off as "the true Valiant Warrior", no less.

It's no surprise that different people have very different ideas about what goes on behind Venture's factory walls, given that Venture is notoriously secretive about its customer relationships.

The lack of public information means that plenty of assumptions have to be made, so the handful of investors and analysts that The Business Times has spoken to each think that the next guy's numbers are "way off the mark".

In the more aggressive camp, the Valiant Varriors estimate that Venture sold about 13.5 million IQOS ("I quit original smoking") units to Philip Morris last year for S$1.2 billion, or 30 per cent of 2017 group revenue.

The last research house to publish a note on the matter was Citi, which took a more conservative count. Citi analysts estimated last week that Philip Morris sold only 3.3 million IQOS devices in 2017: "Assuming COGS (cost of goods sold) prices between 40-60 per cent of retail prices translate to revenue contribution no more than 6 per cent of Venture's 2017 revenue."

Citi added: "Doubling these units for channel inventory still gives revenue concentration near to 12 per cent, far from the fearful 30 per cent cited by investors."

In response to queries from BT, the Valiant Varriors stood by their calculations: "For newer product launches, it is very common for FMCG (fast-moving consumer goods) companies to prepare higher inventory levels... IQOS is a relatively new product and they could be buying more for marketing and promotions (free test products for example). What they actually sell into the market may not be that related to how much they procure from Venture. That's also the reason why they are cutting back on orders for 2018. Too much inventory in their channels and sales have plateaued."

On Monday, Venture bought back 109,000 shares worth S$2.26 million from the market, the first share buyback it had done since July 2016.