Today marks the first day of electronics contract manufacturer Venture Corporation Ltd’s (SGX: V03) debut as a blue chip stock. The company is a replacement in the Straits Times Index (SGX: ^STI) for Global Logistic Properties Ltd (SGX: MC0), which is being taken private.
As Venture has just become a blue chip stock, interest in the company from investors may be high. I thus thought it will be interesting and useful to look at how risky Venture’s stock may be.
In a previous article I wrote, I shared three questions investors can ask to determine how risky a stock is. Here are the questions (you can head to my previous article for an explanation on the questions):
1. Is there any form of concentration in the company’s business model?
2. Is the company’s valuation high?
3. Is the company’s balance sheet weak?
My questions are not the only important things investors should assess when determining how risky a stock is. But, they can still lead to valuable insights on the crucial subject of risk. With the three questions in mind, let’s see how Venture fares.
Venture is a company with contract manufacturing expertise in multiple areas, such as “printing and imaging; advanced storage systems and devices; handheld interactive scanning and computing products; RF communications and network; test and measurement equipment; medical devices and life science equipment; retail store solution suite of products and industrial products and installations.”
It has three business segments: Electronics Services Provider; Retail Store Solutions and Industrial; and Components Technology. In 2016, the three segments accounted for 71%, 25%, and 4%, respectively, of Venture’s total revenue of S$2.87 billion.
The questions on risk
With regard to the first question on risk, Venture can be seen to have a moderately high level of customer concentration given that one customer made up more than 10% of the company’s total revenue in 2016. The customer was from the Electronics Services Provider segment.
In terms of geography, Venture appears to be well-diversified. Singapore was its single largest revenue source in 2016, but it had a share of just 34.9%. The Asia-Pacific region (excluding Singapore) accounted for 59.0% of the company’s total revenue in the same year.
Coming to the second question, Venture currently has a price-to-earnings (PE) ratio of 21.7. Not only is this nearly double the market’s PE ratio of 11.5, it is also near a five-year high as shown in the chart below:
Source: S&P Global Market Intelligence
But, it’s worth noting that Venture’s profit performance in 2016 and the first nine months of 2017 have been excellent. In 2016, its earnings per share (EPS) grew 16.1%; the first nine months of 2017 saw its EPS soar 78.6% year-on-year.
Lastly, on the question regarding the company’s balance sheet strength, Venture has a rock solid balance sheet. As of 30 September 2017, the company had S$599.6 million in cash, and just S$64.5 million in total debt.
A Foolish conclusion
To sum it up, Venture is a company with very low balance sheet risk given its high net-cash position. Although Venture’s PE ratio could be seen as high – when compared to the company’s own history as well as to the market – the company’s strong historical earnings growth in recent times could make up for it.
The company does have high customer concentration though, which elevates concentration-risk.
We’ve answered three important questions on how risky Venture is. But do note that this study should not be taken as the final word on Venture’s investment merits. See the information here simply as a good 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 does not own shares in any companies mentioned.