After Climbing By 119% In A Year, Is There More Room To Run For Venture Corporation Ltd?

Over the last 12 months, electronics services provider Venture Corporation Ltd (SGX: V03) has seen its stock price jump by an impressive 119% to S$21.48 currently. The last time Venture’s stock price was at that level was in the first half of 2004, more than 13 years ago.

Investors may thus wonder if there’s still any more room left to run for Venture’s stock? There is no easy answer, but we may be able to find some clues from an investing checklist that the legendary investor Peter Lynch shared in his book One Up On Wall Street.

Lynch ran the US-based Fidelity Magellan fund from 1977 to 1990 and racked up an incredible annualised return of 29%. In One Up On Wall Street, Lynch wrote about a general checklist he had used when he was searching for investing opportunities. Let’s run Venture through the checklist and see what turns up.

1. The Price-Earnings ratio: Is it low or high for this particular company and for similar companies in the same industry (generally, low PEs are preferred)?

Right now, Venture has a PE ratio of 21.5. The chart below shows the company’s PE ratio over the past five years, and you can see that Venture’s current valuation multiple is near a five-year high. This suggests that the company’s PE is high.

Source: S&P Global Market Intelligence

For another perspective, we can look at the PE ratios of companies that are in a similar line of business as Venture. These include Valuetronics Holdings Limited (SGX: BN2) and Memtech International Ltd (SGX: BOL). Right now, the duo have PE ratios of 13.1 and 8.7, respectively. From this angle, Venture’s PE ratio also appears to be high.

2. What is the percentage of institutional ownership? The lower the better.

This criterion was added by Lynch because he thought that companies that were not noticed by institutional investors (big money managers) tended to make for better bargains.

According to Venture’s 2016 annual report, it does have a high level of institutional ownership. As of 7 March 2017, there were four different groups of institutional investors that each owned 5% or more of the company’s stock. The institutions were BlackRock Inc., The PNC Financial Services Group, Sprucegrove Investment Management, and the Aberdeen family of funds.

3. Are insiders buying and whether the company itself is buying back its own shares? Both are good signs.

Over the past six months, Venture’s chairman and chief executive officer, Wong Ngit Liong, had bought shares on two separate occasions. On 14 July 2017, he purchased 166,300 Venture shares for S$2.08 million. Two months later on 12 September 2017, Wong shelled out S$6.102 million for 400,000 Venture shares.

4. What is the record of earnings growth and whether the earnings are sporadic or consistent?

Here’s a record of Venture’s earnings per share over the past decade from 2006 to 2016:

Source: S&P Global Market Intelligence

We can see that Venture has been consistently generating profits for a long time. But, there is also no sustained long-term trend of growth in the company’s earnings per share.

5. Does the company have a strong balance sheet?

Based on its latest financials as of 30 September 2017, Venture had S$599.6 million in cash and equivalents, and just S$64.5 million in total debt. That’s a really healthy balance sheet.

A Final take

On the positive side, Venture has a good record in generating profits, the presence of insider buying, and a strong balance sheet. The negatives are a PE ratio that’s near a five-year high, high institutional ownership, and a lack of consistent growth in profits.

Judging from the results of the checklist, Lynch would probably not have much interest in Venture at its current price. But, it’s worth noting that Lynch’s checklist, as useful as it may be, should only be seen as an informative starting point for further research.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Valuetronics Holdings.