26 April 2018

Venture Capital (V03)

Our rating: Sell

When we sent out our first note to warn investors ahead of Venture’s first quarter results, many mocked us. The Venturists dismissed us as being troublemakers, or, worse, lunatics who had nothing better to do than to write a press statement about the company.

Sure, they argued, Venture was going through a blip but its prospects remain bright. And yes, the share price will correct but it is unlikely to crash.

After yesterday’s release of Venture’s Q1 results, this group of supporters are likely to start shrinking.

Since we released our first report on 24 April, Venture’s shares have dropped 8 per cent. Before the release of Venture’s Q1 results yesterday, shares dropped by 3.5 per cent alone, in just one day.

The cracks are showing, and the fissures are growing. But the earthquake has not yet hit.

Currency swings

Venture reported that its revenue rose to $865 million in Q1, up by just 1.5 per cent from its $843.1 million compared with last year. Profits looked decent as well, rising 72.2 per cent over the past year to $83.7 million.

The numbers does not seem to look like the company is one that will be crashing anytime soon. But there are clear signals that something is not right with its latest set of results.

First, a weak rise in revenue, which is the lifeblood of a contract manufacturer like Venture, is a sure sign that its prospects are dimming.

It blamed currency volatility as the main cause for the tepid rise in revenue.

“For the quarter ended 31 March 2018, the Group registered revenue of S$856.0 million, an increase of 1.5% year-on-year due to the effects of a weakened US dollar. In US dollar terms, revenue for the reported quarter would have grown by 9.1%,” said the press release.

It later added: “In spite of the weakened US dollar and heightened uncertainty due to geo-political environment, the Group managed to report a creditable set of results in the first quarter of 2018.”

George Washington famously said “It is better to offer no excuse than a bad one”.

To attribute poor business performance to currency fluctuations is equivalent to blaming the slippery pitch when you miss a penalty. Think David Beckham.

Currency risk is every manufacturers’ nightmare. Orders are usually locked in months in advance and when volatility hits, the value of the orders also fluctuates in tandem.

But blaming currency fluctuations are a red herring. There are instruments and derivatives to hedge against any big currency swings. It would very odd if a company as big and established as Venture did not hedge against its USD exposure.

The biggest problem here is that even if USD did weaken against the Sing dollar, there is no explaining away the fact that its revenue fell horribly short of consensus estimates.

To recap, the street expected that Venture would log, on average, S$940 million in revenue, and S$91 million in profit. Some such as Credit Suisse even said that Venture would hit S$970 million in revenues.

In our first report on Venture, we flagged that Venture will miss estimates by between 6 per cent and 8 per cent. Here’s what exactly we said: “We estimate that Venture will miss Q1 earnings by between 6 per cent and 8 per cent.”

Venture’s earnings was at S$83.7 million; the street expected S$91 million. The difference?

8 per cent.


IQOS - I’m Quite wary Of Smoke

Prior to the results, analysts were already wary of Venture’s link to Philip Morris International and its range of IQOS products. But it is likely that post results, many analysts are recoiling in horror, realising that the gold they thought they held in their hands is actually lead.

Our point is simple: Venture is still overly reliant on the IQOS revenues and that it is losing the battle in the face of a formidable competitor – Flextronics, whose manufacturing prowess is suffocating Venture.

If Venture does not innovate quickly and make up for the difference, you can expect the shortfall will only grow exponentially into the other quarters, and they will eventually miss full year revenues and earnings by leaps and bounds.

So is currency to blame, or IQOS, for Venture’s dismal Q1 performance?

There is one way to find out. Venture should release another set of numbers in the operating currency (i.e. USD) that would reveal the actual operating performance of the company.

That would instantly reveal whether currency fluctuations worked to damage Venture that badly, or whether Venture is using currency to protect itself.

About Venture Corp

Venture Corp Ltd is a Singapore-based company that provides technology services, products and solutions. It provides manufacturing, product design and development, engineering

and supply-chain management services.

About us

Valiant Varriors are a group of activist investors on the lookout for companies that are priced incorrectly due to the lack of transparency in large listed stocks in Singapore. If the companies themselves don’t want to come clean, we will help them along the way. All our efforts is in the valiant attempt to help SGX be more investor friendly and promote The Lion city to the rest of the world.



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