Disclaimer: Some of us do hold a position in the company and the recommendation is solely ours and every investor is required to verify its information from multiple sources before deciding to buy or sell shares.
24 April 2018
Venturing into the smoke
Venture Corporation (V03)
Our rating: Sell
It is a well-established fact that smoking kills. It infects the smoker’s lungs, turns it black and slowly but surely eats into his lifespan. The people around the smoker also suffer. Through no fault of their own, they, especially his loved ones, inhale the smoke that cigarettes generate. With prolonged exposure, cancer slowly tightens its grip around the lungs, stomach and throat.
Despite the years of warnings, and countless government regulations, people still smoke. For them, each inhalation fills them with warmth and joy, instead of death and ruin.
Investors have been inhaling Venture Corp’s smoke for too long. For a while it was good, enjoyable and plenty profitable. But the Grim Reaper is lurking and those who continue to pretend that this illusion is real will be burnt, badly.
Venture Corp is one of the market’s most beloved darlings. A bellwether for the manufacturing sector, which has enjoyed a purple patch, Venture has seen its stock price triple over the past year.
The story they paint is a convincing one: A large cap blue-chip stock with a diversified customer base that is composed of some of the biggest companies in the world. If investors want to ride on the manufacturing surge, what better way to do it than to latch onto Venture Corp?
The story took hold and investors poured in. But not is all as it seems.
The first smoking gun came recently. Last week Philip Morris International’s (PMI) stock price plunged 16% after showing weak first quarter results. PMI missed revenue estimates at $6.90 billion, compared with the $7.03 billion the street expected.The fall was blamed on a plateau of their I Quit Ordinary Smoking (IQOS) products - e-cigarettes which are supposed to be healthier for smokers.
For Venture, this is big trouble because it is a key supplier of IQOS to PMI. Investors took note and sold in a hurry, causing the stock price to fall 12 per cent in one day from its recent high.
Some analysts believe that the stock sell-off was overdone and insist that the stock remains a buy. We believe these analysts have their vision blurred in the smoke and are addicted to the exciting but ultimately ruinous illusion that Venture is.
The cause for the optimism among some stock analysts is that the IQOS’ contribution to Venture is not significant. Estimates range from as low as 3 per cent, to as high as 11 per cent. This is backed up by Venture, which said that not one customer makes up more than between 5 per cent and 10 per cent of their total sales.
This is most probably an understatement of the truth of the matter. Part of this is probably the result of Venture being under strict confidentiality agreements with clients. At the least, the statement is misguided optimism; at the most it is an outright lie.
The truth is out there, far out there. Based on our extensive research, we believe that IQOS accounts for 30 per cent of Venture’s revenue.
Secondly, we have to ask about the extent of the damage IQOS has done to Venture. According to our sources, Q1 sales orders at Venture have declined by a staggering 50 per cent from initial 2018 forecasts.
This is partly affected by the entry of PMI’s second supplier, Flextronics, which is hungrier and more aggressive than Venture. Flex’s supply price to PMI is 20 per cent lower than Venture, which means they are producing 20 per cent more volumes too.
Venture should not be trading at 16x forward earnings. That is reserved for fast growth companies. Venture is anything but fast growing, and, in fact, quite the opposite after PMI’s fiasco. If you think last week’s 12% correction was harsh, you are wrong. It is not even enough to reflect the true value of the company.
This is just the start of the troubles for Venture. You will see the impact on the first quarter’s earnings tomorrow. We estimate that Venture will miss Q1 earnings by between 6 per cent and 8 per cent.
Don’t believe us? Look out for the Q1 earnings release, which will be released on April 25.
The bleeding won’t stop either. Like the cancer which spreads slowly first, then quickly, the company’s bright prospects will dim and then turn down, fast. Quit smoking, while you still can.
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.
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.