SINGAPORE (May 8): Citigroup is keeping Venture Corp at “buy” with unchanged $31.74 target, saying sales contribution by Philip Morris International’s looks closer to 12% than the 30% feared by investors.
In addition, Venture’s PE valuations are now at 9% discount to Singapore’s market average but with earnings growth at least twice better, says Citi.
Indeed, Venture’s stock price has retraced 29% from its peak, driven by slower-than-expected uptake in Philip Morris’ Reduced Risk Products (RRP) -- such as smokeless e-cigarettes -- as well as investors’ fear of “concentration risk” crimping Venture’s 2018 growth.
However, calculations by Citi indicate that given the 3.3 million iQos or “I quit original smoking” devices Philip Morris sold last year and assuming costs of goods taking up 40-60% of retail prices, this translates to revenue contribution of “no more than 6%” to Venture’s 2017 revenue.
In fact, Philip Morris has plans to add a second supplier by early 2018 after being “supply-constrained” in 2017, says Citi.
“We believe Venture has a diversified customer base with more than 100 active customers, with only 1 customer above 10% which has been the case since 2013, with its top 10 customers accounting for 50% of group revenue,” adds Citi.
To recap, strong margins drove Venture’s profitability in 1Q18, NPAT grew 72% y-o-y while NPAT margins hit 9.8%. Neutralising impact from forex, Citi estimates NPAT margins would have hit “double digits”.
And although 1Q18 cash conversion cycle was higher at 102 days, which was last seen in 3Q16, management alluded this to higher inventory and raw materials in support of customer ramps in 2Q and 3Q.
As at 1.01pm, shares in Venture are up 76 cents at $21.41.
