Venture shares continue to tumble on concerns over its customers

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Venture shares continued to tumble after tobacco giant Philip Morris’ results hurt its outlook and concern the ban on U.S. companies doing business with ZTE will hurt one of its clients.

The stock was down 8.84 percent at S$23.31 at 11:39 A.M. SGT on Tuesday; that marked a more than 19 percent drop since Thursday’s closing price.

In a statement to SGX in response to a query on the price movement, Venture said on Friday that it wasn’t aware of a reason for the decline.

But analysts pointed to other causes.

In February, UOB KayHian published a report titled, “This changes everything,” saying it found “strong evidence” that Venture was making a “leading consumer device” for a U.S.-based multinational company. Neither the device, nor the multinational company were named, but the report estimated the project had potential revenue in excess of S$2.5 billion per annum. That helped to set off a surge in the stock.

Separately, a Maybank KimEng report in January reportedly claimed that Venture had won a contract for smokeless cigarette devices from a “tobacco giant.”

Philip Morris results

Philip Morris’ results showed that IQOS, a device which heats but doesn’t burn tobacco, added only 3 percentage points to cigarette volumes, halving the growth rate of the previous quarter, Marketwatch reported last week. The product had met initial success in Japan, although growth there was hurt by supply chain issues, but the company had expected that once those were resolved the IQOS would see better demand; it didn’t happen, Bloomberg reported last week.

That comes amid competition from rival products. Those results had sent Philip Morris shares down as much as 17 percent on the day.

CGS-CIMB said in a note on Friday that it estimated Philip Morris could have accounted for 7.0 percent or more of Venture’s fiscal 2017 turnover.

Hit from ZTE ban?

Separately, the U.S. has banned U.S.-based companies from doing business with Chinese telecom-equipment maker ZTE for seven years due to a breach of Iran sanctions. That was set to hit Oclaro, which is a supplier to ZTE and got 18 percent of its fiscal 2017 revenue from the Chinese company, Reuters reported.

CGS-CIMB said it estimated that Philip Morris and Oclaro together could represent 7-10 percent of Venture’s revenue last year, noting that Venture’s annual report said only one customer accounted for more than 10 percent of its revenue last year.

Venture’s results are due on Wednesday and CGS-CIMB noted that the first quarter historically accounted for 20 percent of full-year performance, with an on-quarter decline typical. It forecast a 34 percent on-quarter decline and an 80 percent on-year increase in first-quarter net profit to S$87.5 million.

“There is insufficient basis to slash our estimates for Venture at this juncture,” CGS-CIMB said. “However, the clouds of trade/tech war between the US and China could soften sentiment on Venture.”

It kept an Add call with a target price of S$30.81.

With buy orders as low as S$23.04, below the intraday low of S$23.07, and sell orders as high as S$23.58, above the day’s high of S$25.39, that may suggest a trading range.

The early February low of S$21.15 may offer longer term support.

Clarification: This post was updated to reflect that CIMB expects an on-quarter decline in first-quarter earnings.