On Thursday, BofA Securities adjusted its stance on Venustech Group Inc (002439:CH), downgrading the stock to Neutral from Buy, despite increasing the price target to RMB19.00 from RMB18.00. The revision follows Venustech's third-quarter results for 2024, which showed revenues falling significantly short of expectations, at 35% below consensus and BofA's own estimates.
The downgrade is attributed to a dim growth forecast in the near term, influenced by weaker cybersecurity demand due to macroeconomic challenges. Additionally, the firm's gross profit margin (GPM) has been under pressure, declining to 54.8% in the first nine months of 2024 from 66.0% in the full year of 2021. This drop in GPM is a result of an unfavorable shift in the revenue mix.
Despite the near-term growth concerns, BofA Securities still recognizes Venustech's long-term growth potential, especially through its business synergies with CM. However, the firm has reduced its revenue estimates for fiscal years 2024 to 2026 by 12-15% to account for the anticipated soft demand.
In justifying the new price target, BofA Securities has rolled over its valuation, applying a 28 times multiple to the 12-month forward estimated P/E ratio. This is an increase from the previous multiple of 22 times and is 25 days below the sector's mean. The new price objective is now set at one standard deviation below the historical average since 2017, reflecting the need to accommodate the expected softer demand in the near-term.
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