All You Need To Know About Straits Times Index’s Newest Member, Venture Corporation Ltd

The Straits Times Index is the most globally-recognized stock index and the market barometer of Singapore’s equity market, consists of 30 large market-capitalization blue-chip stocks such as DBS Banks, Singtel, Keppel Corporation.

Every quarter, the index administrator FTSE Russel, SPH and SGX would conduct a joint review of the index constituents. The next 5 largest companies by market value, in the STI reserve list, would stand a chance to join the STI.

During the most recent quarter review, Venture Corporation Ltd would join the STI effective 5 Jan 2018, to replace Global Logistic Properties that had been bought over as it maintained the highest market value in the reserve list as of 2 Jan 2018.

Introduction

Venture Corporation Ltd (SGX: V03) is a leading global provider of technology services, products and solutions. It offers manufacturing, product design and development, engineering, and supply chain management services to the electronics industry. Headquartered in Singapore, the group comprises about 40 companies with the global cluster of excellence in South East Asia, North Asia, America and Europe, and employs about 12,000 people worldwide. It achieved a revenue of $2.87 billion and a net profit of $186 million in 2016.

Weightage in STI

According to SGX Market Updates dated 3 Jan 2018, Venture could take up a 1.57% weight in the index, based on the free float market capitalization of index constituents on last trading day before the previous review. In perspective, GLP weightage was 3.3%. A 1.57% weightage would also place it above the likes of SPH, Comfort Delgro and Sembcorp Industries.

Financial Results

Source: SGX StockFacts

Sales over last 5 years

Venture’s annual revenue has shown impressive growth in the last 5 years. From FY 2013 to Last-Twelve-Months (LTM) ended on 30 Sept 17, its sales grew from $2.33 billion to $3.77 billion. This is a Compounded Annual Growth Rate (CAGR) of 10.1% per annum. While FY 17 has not ended, based on the LTM figures, Venture should have no issue attaining a similar revenue growth this year.

Gross Profit and Net Profit

In terms of Gross and Net Profit, Venture saw them expanding from $536 million to $883 million, and $131 million to $282 million respectively. This means a CAGR of 10.5% and 16.5% over the same period.

Gross and Net Margin

Venture Corporation Ltd’s Gross Margin has been consistently above 23% in the past 5 years, with the latest LTM gross margin at 23.4%. Its Net Margin ranged between 3.08% in FY14 and 7.52% in latest LTM.

Operations Efficiency

Source: SGX StockFacts

Operations efficiency is a key indicator of Venture’s manufacturing and production performance. Here, I look at three important metrics to understand better how has Venture fared in its day-to-day running:

• Return on Assets (ROA) – a measure of how much profit is generated from company’s assets
• Return on Equity (ROE)– a measure of how much profit is generated from shareholder’s equity
• Avg Days Inventory – estimated number of days it takes to sell inventory

Both ROA and ROE have shown a healthy uptrend over 5 years. It is noteworthy that LTM ROE increased to almost 15%, its highest within the period. ROA grew steadily from 3.4% to 7.4%. It is clear that Venture is getting more efficient at churning out profits using company assets and shareholders’ equity.

Average Days Inventory dropped from 103 days to 83 days. This means that Venture is selling its inventory at a faster pace thus converting its stored products into cash at a shorter cycle. This is always a good development.

Dividends

In the past 5 years, Venture Corporation Ltd has maintained a constant dividend amount of $0.50 per share. At a price of $22.35, this translates to a dividend yield of 2.2%. However, as its earnings have been increasing, a constant dividend amount may mean that management is being more prudent in managing its cash in preparation for future expansion plans.

Share Price Performance

Based on its good fundamentals discussed so far, it is not surprising that Venture’s share price has been on a tear in 2017. It generated a 115.4% total return in 2017. This is a better return than the top-performing STI shares: Yangzijiang Shipbuilding (80.4%), Global Logistics Properties (53.2%), City Developments Limited (50.8%), UOL Group (48.1%) and Genting Singapore PLC (44.8%).

Growth Drivers

Venture’s prospect looks bright at the moment. According to a Maybank Kim Eng research report, Venture is expected to witness revenue growth arising from 2 areas. Firstly, enlarged orders from key customers with higher sales due to Mergers & Acquisition deals and industry upturn. Secondly, as Venture has invested heavily in R&D, it would clinch higher value projects with better margins.

Risks

Venture faces risks from order cancellations and revisions. As a contract manufacturer, the fate of electronics market players determines its revenue.

Another risk pertains to Forex risk. As venture earns revenue and pays for supplies in US Dollar with financial results reported in Singapore Dollar, any unforeseen wild fluctuation of the exchange rate between the 2 currencies would cause a dent in its results.

Conclusion

The recent inclusion of Venture Corporation Ltd into the STI is a testament to its good performance in the past year. Backing up its stellar share price is improving fundamentals and earnings. Nevertheless, investors would need to monitor its performance closely in future, which is largely dependent on the electronics industry which can be highly cyclical.

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