• Upgrade to BUY from Neutral, new SGD16.50 TP from SGD14.20, 11% upside. We upgrade our call as we think Venture Corp is seeing the tail-end of its customers’ destocking phase, and anticipate its recovery moving into FY25. Our rating downgrade (done on 25 Feb) was due to the continued customer destocking situation, but we have maintained that its recovery will commence in 2H24. We raise our TP post lifting our earnings estimates and P/E (to 16x, from 14x) on blended FY24-25F earnings – on a recovery in FY25F.

• Expect customer destocking to ease from 2H24. Earnings for VMS in 4Q23 and 1Q24 were dismal, led by weak customer orders as inventory levels accumulated, which stemmed from destocking activities. In 1Q24, customer destocking remained evident – albeit tapered – and we continued to expect customer demand to remain subdued going into 1H24, before a recovery takes place in 2H24. Some of VMS’ peers have also experienced similar customer inventory situations earlier on – they were also optimistic on sequential improvement, with customers in certain sectors seeing inventory bottoming out. Hence, we expect improving customer orders as inventory levels in the supply chain ease going into 2H24 and FY25.

• Raise FY25-26F earnings by 3%. As we anticipate a recovery moving into FY25, we raise our earnings forecasts by a further 3%. Prior to this, we had already priced in some recovery and now impute earnings growth of 5-7% YoY for FY25-26F. We now believe the recovery will be stronger going into FY25, as we expect the customer destocking situation to ease in 2H24, and restocking to commence going into FY25. VMS’ peers currently trade at 17x forward P/E, while its current mean P/E is at 16x. Since we have turned more positive on VMS’ earnings prospects, we now peg our valuation at 16x blended FY24F-25F P/E (from 14x). This results in a higher TP of SGD16.50. The 16x target P/E is also more in line with the peer average. The stock is trading at an attractive -1SD from the forward P/E mean.

• A positive longer-term outlook. We expect longer-term growth to be driven by: i) New customers in the EMS++, precision engineering, and Ventech Group businesses (including customers in medical technology and lifestyle sectors, and promising technology domains); ii) new businesses (as customers relocate closer 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.

• Downside risks to our forecasts include earnings downside on a weaker- or later-than expected recovery in customer orders and demand. 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 - 25 Jul 2024