US approval for smokeless cigarette device could boost Venture's earnings: analyst

Venture may manufacture 12 million 1QOS devices for Philip Morris by 2020.

Venture Corporation could bank on the US market for growth opportunities after the Food and Drug Authority’s (FDA) approved the sale of I-Quit-Ordinary-Smoking (iQOS) device, which tobacco giant Philip Morris International (PMI) plans to start selling by June.

The IQOS smokeless cigarette device that Venture creates for PMI made up about 25% of 2017 revenue and 40% of gross profit. By 2020, a base case scenario assumes that Venture would manufacture 12 million iQOS devices, according to UOB Kay Hian.

“Every additional 1 million devices could increase Venture’s 2020F net profit by $7.3m, or 1.8% of 2020F net profit. To recap, we estimate Venture sold around 12m iQOS devices in 2018,” according to UOBKH analysts John Cheong and Joohijit Kaur.

PMI commented that the FDA approval is an important step thatoffer a smoke-free alternative for around 40 million American smokers, which makes the US a huge market for the product. However, analysts warned of potential competition from early birds.

“Despite the huge addressable market, we note that Juul, a vaporised e-cigarette, has already started selling in the US since 2015 and commanded more than 70% market share as of 2018,” the analysts said in a report.

Also read: Venture Corporation profits grew 8.6% to $90.87m in Q1

As one of the iQOS device manufacturers, analysts think that Venture could benefit from more demand for the device. “However, we think the impact on Venture’s 2019 earnings could be muted as iQOS sales could initially be drawn from old inventories and the device could have been built by Venture earlier.”

Venture Corporation’s profits jumped 8.6% YoY to $90.87m in Q1 2019 from $83.67m. Its revenue was also up 8.5% YoY from $856.01m to $928.75m.