Thursday, June 5, 2014

Self-advertisement: Return with a "Venture"

(Vested interest)

This time round, I look at Venture competitors, mainly Jaibil, Plexus, and Benchmark electronics.

First, I wanted to know if competitors are doing brisk business when Venture is floundering. Generally, all 3 competitors have revenue that are generally increasing or stable over the last 5 years.

Next, margins.

Venture has the best net margin of sub 6%, over the last five years. The three competitors have margins of 2-4% over the last five years. Jaibil is the biggest, with almost 18 billion of revenue, but margin is also the lowest, this is partly due to the it having 3 business segments,within the EMS. In terms of margin, Venture wins. But given the competition of the sector, the niche of design most be accompanied by costs, otherwise, there is no need to outsource the manufacturing by the customers. So lofty margins are unrealistic. With better revenue and scale, Venture margin might improve, but I think it would be a tall order to expect it to return to 7%.

 

Next, ROA, ROE.

With the exception of jabil, the others are in netcash position, and Venture, Benchmark, and Plexus both have rather similar ROE; 7.7%-10.3% ; 8.7%-15%; 4.9%-9%

ROA; of Venture, benchmark and Plexus; 5.2%-7.4%; 4.5%-6.9%; 3.3%-6.3%

I would say Venture is comparable to both, but Plexus does stand out quite strongly.

 

FCF

Almost all 4 companies has strong FCF capability. In terms of FCF/rev;

Venture is most volatile over the past 5 years, from 1% to 9%, Plexus is stable at around 4%, excluding a year of negative FCF, Benchmark  is around 2-4%, with 2 years of negative FCF

Well, Plexus again stand out, but Venture has only 1 year of negative FCF in the 13 years of history

Let look at DCF(10 years.. ), one of the valuation tool:

Apply 3% growth and 9% discount with 20% MOS (IF you believe they are comparables, I do, comparable rev, ROE, ROA and margin)

Current price premium over DCF price:

Venture=5.5%

Plexus =281%

Benchmark= 83%

For Benchmark to justify current price, they need discount rate of 6% and growth 3%, and Plexus need even more lofty assumption.

 

PE valuation over the past 5 years.

Venture= 7.7-18.9

Plexus = 8.6-22.5

Benchmark= 7.9-21

Again comparable.

 

Dividend Yield (from Maybank research)

Jabil=2%

Plexus and Benchmark= 0%

 

Many of the industry the customers of the 4 companies are in overlapped. Network/comm, industry, life/medical science, computer etc.

Venture,  is the only one with significant number of customers from the printing and imaging segment. The one that is dragging Venture down, but also the one with promise of rebound due to the growth of 3D printing.

 

Conclusion

I have completed what I wanted to look at Venture.

1) Internally, FCF stable, valuation reasonable, competencies increasing, customers increasing (Does not show in Rev though)

2) Customers,

POS customers doing well, Oclare should ramp up production soon, lifescience sector has shown across the board growth, Jabil, Plexus, Benchmark all register positive growth from this segment. Printing will show short term pains but longer term growth.

3) Competitors

Not actually a mickey mouse when compared with their global cousins. Only losing part is declining revenue when peers are holding up well. But Venture outlook is improving. In terms of valuation, 2 out of three, in terms of dividends yield and DCF, show cheaper valuation. In terms of PE, comparable. Other comparable like ROE, ROA, margins etc are ok.

Venture should return with a vengeance? I don't know. I decided not to wait anymore. The next few quarter could be lumpy due to tax rebate issue, but revenue and gross profits should show QoQ improvement. Watch those numbers.

 

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