DBS: This is how much the US dollar affects Venture’s earnings

U.S. two-dollar billsPhoto by Leslie Shaffer

Venture pointed to the U.S. dollar’s weakness as negatively affecting its first-quarter earnings, which disappointed market expectations.

The technology services and contract manufacturer reported first-quarter net profit rose 72.2 percent on-year to S$83.7 million on revenue of S$865.0 million, up 1.5 percent on-year. In the release after the market close on Wednesday, the company pointed to a weaker U.S. dollar and heightened geo-political uncertainty, noting that in U.S. dollar terms, revenue would have grown by 9.1 percent.

DBS said in a sensitivity analysis, every 1 percent appreciation of the U.S. dollar against the Singapore dollar would increase net profit by around 1.9 percent. Much of Venture’s revenue is derived in Singapore dollars, the bank said in a note on Thursday. The bank forecast the dollar/Singapore dollar pair to move to 1.37 by end of 2018, from 1.33 currently.

Around 50-55 percent of Venture’s cost base, excluding cost of goods sold (COGS), is denominated in Malaysian ringgit, DBS said, adding that it expected the dollar to appreciate against the ringgit, with the pair to move to 4.18 by the end of the year, from 3.93 in the first quarter.

Its sensitivity analysis indicated that every 1 percent depreciation of the ringgit against the U.S. dollar would increase net profit by around 2 percent.

DBS said that Venture shares were oversold on several market rumors about Philip Morris’s IQOS device after the tobacco giant’s results showed the product, which heats but doesn’t burn tobacco, had seen slower demand growth after sales surged last year. The bank said concerns over Philip Morris were overdone as the stock price’s current levels assumed zero growth.

The stock closed down 1.55 percent at S$22.22 on Thursday, retracing its intraday drop to as low as S$19.84, the lowest since November. That low point marked a more than 30 percent drop from the April 19 close at S$28.82.

But DBS said it expected the “decent” first quarter results would calm market jitters.

“We remain positive on Venture’s growth profile, and believe the market has yet to fully price in the group’s unique offerings, know-how and hard-to-replicate ecosystems,” it said. “The doubling of R&D expense (a possible leading indicator for the group) and rise in inventory levels to a record S$725 million despite the first-quarter lull also suggests that Venture could be preparing for more orders ahead.”

But in the wake of the first-quarter revenue growth concerns, it lowered its growth assumptions for 2018-19 by around 5 percent per annum. It also cut its target price to S$27.20 from S$32.20, after lowering its valuation multiple to 17.5 times, in line with peers’ average, down from the premium 19.5 times. It kept a Buy call.