Venture downgraded by UOB KayHian on concerns IQOS production is slowing

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UOB KayHian downgraded Venture to Hold from Buy on concerns that production of key product IQOS is slowing.

“The combination of an unexpected slowdown of sales in Japan, the price war with Japan Tobacco, and competitor FLEX’s lower cost of production, has seen IQOS production share shift away from VMS faster than we had expected,” UOB KayHian said in a note on Friday. “Actual orders are coming in lower than the original production outlook had suggested.”

The brokerage said its “deep dive” into the product’s supply chain suggested IQOS’ revenue contribution to Venture was around 25 percent in 2017 and the gross profit contribution was 40 percent. Venture makes the I Quit Ordinary Smoking (IQOS) smokeless cigarette device for Philip Morris International.

“With IQOS production slowing down and shifting away to its competitor, VMS’ earnings are at risk of declining in 2018 and beyond,” it said, noting the margins from producing IQOS were above average. “With this and slowing growth momentum from the T&M/Med segment, earnings growth in 2018 will moderate or even decline,” it said.

It cut its 2018-20 earnings forecasts by 16-34 percent on expectations growth and margins would normalize. It lowered its target price to S$18.20 from S$25.00.

The stock was up 2.43 percent at S$17.31 at 10:05 A.M. SGT on Tuesday.