Short seller reports put heat on Venture for the rest of H1

Analysts cite weak e-cigarette sales of Philip Morris, which contributes 10% to Venture's revenue.

After Philip Morris International (PMI), a customer of Venture Corporation, commented that its IQOS (smoke-free electric cigarette) devices in Japan recorded slower-than-expected growth in sales, the latter's share price has plunged by nearly a third and lost its dominance as the top-performing stock in Singapore.

PMI attributed the slowdown in IQOS growth to saturating the early adopters and innovators earlier than expected, and slow adoption by the segment in their 50s, which represents ~40% of the smoker population in Japan.

OCBC Investment Research analyst Eugene Chua noted that it is an issue of speed of growth and not decline in sales and reiterated PMI remains on track to meet their full-year sales target for IQOS. "We estimate PMI contributed ~10% of Venture’s FY2017 revenue. Hence, it seems unjustifiable for the plunge in Venture’s share price, which suggests wiping out more than PMI’s contribution to Venture," he added.

However, for UOB Kay Hian analyst Foo Zhi Wei, Venture's management did little to alleviate concerns raised by a recent short seller report, beyond remarking that they found the points raised to be false. "The lack of disclosure and re-assurance from management will continue to mire the stock in uncertainty. With no clear guidance on what is factually accurate, the share price will likely remain volatile," he commented.

The analyst added that the production outlook for IQOS will only be clearer going into 2H2018 as they await signs that other countries and the US FDA approval to take up the slack in Japanese demand.

"In the meantime, there is a risk of 1H2018 being a soft patch, and we caveat the risk of Venture losing market share to the second supplier due to the former’s higher pricing," he said.

However, the two analysts are still bullish over Venture's growth aspects outside of PMI.

Foo noted that its clients in the key T&M/Medical segments such as Agilent, Keysight, and Thermo Fisher are expecting strong revenue growth, with consensus forecasting 10-16% YoY growth for all three clients. "Networking and communication is also expected to see strong double-digit revenue growth, driven by Broadcom. These will likely be the key focus for growth post the unexpected demand slowdown for IQOS in Japan," he said.

Chua agreed with Foo and said, "All considered, coupled with a solid balance sheet, we remain positive over Venture’s broad-based growth outlook supported by sustainable margins, as it continues the pursuit and the creation of value through deep collaboration with customers."