Venture upgraded to Accumulate by Lim & Tan on iQOS hopes

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Lim & Tan Securities upgraded Venture to Accumulate from Hold on expectations Philip Morris’ iQOS product will get approval in the U.S.

The product likely accounted for around 10 percent of Venture’s 2017 sales and the company was buying automation equipment to prepare for a faster ramp up of the product this year, Lim & Tan said in a note last week.

Signs that Philip Morris was having trouble persuading older Japanese smokers to switch to the iQOS product had spooked investors, it noted.

“Unfortunately, the unexpected slow-down in Japan’s adoption rate has resulted in a temporary slow-down or growth-gap to the previously ‘fast growth’ scenario,” it said. “However, not all is lost as Philip Morris is currently in the midst of trying to obtain U.S. FDA approval for iQOS to be sold in the USA. Given that iQOS is already widely adopted in Japan and certain parts of Europe, we believe it is a matter of time before the U.S. FDA gives the green light.”

Once that approval is given, it expected Venture would be able to capitalize on fast growth in the new U.S. market, with production ramped up again for the launch, the note said.

“This likely explains the recent bout of share buy backs conducted by Venture’s management,” it noted.

The stock is trading at 13.8 times 2018 price-to-earnings, compared with expected net profit growth of 18 percent this year and its historical price-to-earnings average of 15 times, it noted, adding that after the selloff of 30 percent from its peak earlier this year, the dividend yield is nearly 3 percent.

The stock ended Thursday down 2.28 percent at S$20.11.

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