• Maintain NEUTRAL, new SGD14.20 TP from SGD13.90, 2% downside. We retain our view on Venture Corp on the continued customer destocking situation, albeit a tapering trend. Although there is no earnings change post VMS’ 1Q24 results, we raise our TP slightly, rolling over our P/E valuation from 14x FY24F to a blended FY24F-25F earnings base. We believe the stock is still pricing in its immediate term prospects despite expecting earnings improvement in 2H24. We look to a more pronounced earnings recovery before turning positive.

• 1Q24 in line. VMS reported 1Q24 revenue of SGD667m (-19% YoY) and earnings of SGD60m (-18% YoY). Revenue continued to be affected by customer destocking headwinds (especially in the life sciences sector and certain segments of the network & communications market), which are currently tapering off. Revenue and earnings were also lower QoQ at -9% YoY from SGD737m and -10% YoY from SGD67m. Cash flow generation remained strong, with net cash improving to SGD1.2bn as at 31 Mar. This is also due to continued proactive working capital management and optimisation. VMS has guided for revenue to improve sequentially, with 2Q24’s topline to be better than 1Q24 and 2H24’s revenue to be higher than 1H24. We already have sequential revenue and earnings improvement baked into our forecasts.

• Outlook priced in. As 1Q24’s net profit is largely in line with our expectations, we have left our estimates unchanged. Besides, our existing forecast already reflects management’s guidance of a stronger 2H24. Hence, we believe the stock’s immediate-term earnings outlook is already well accounted for. We hold the view of continued subdued customer demand going into 1H24, before orders increase. Meanwhile, ongoing rollout of new product introduction or NPI programmes and strengthening of demand in some domains (based on customer feedback) will support growth, in our view. Our earnings growth for FY24 – led by a 2H24 recovery – is forecasted at 9% YoY. We expect longer term growth to be driven by: i) New customers in the EMS++, precision engineering, and Ventech Group businesses, including customers in the medical technology of MedTech and lifestyle sectors, and promising technology domains; ii) new businesses (as customers relocate to VMS’ operating locations to mitigate geopolitical risks); and iii) offering differentiating and high-value solutions with transformational and innovative capabilities in manufacturing and R&D.

• Risks to our forecasts include earnings downside on a weaker-/later-than expected recovery in customer orders and demand. A better-than-expected earnings recovery would conversely represent the upside risk.

• ESG. As VMS’s ESG score is 3.0 out of 4 – below our 3.1 country median – we apply a 2% discount to its intrinsic value to derive our TP.

Source: RHB Research - 7 May 2024