Venture - CDOs marked to almost nothing but risk of non-recovery is rising

Venture reported 4Q08 net profit of $4.6m (-94% yoy), which included $57.6m in mark-to-market charges for its remaining CDOs and $6.3m in impairment charge for an associate company. Adjusted 4Q08 net profit was $68.5m, 18% lower yoy and 2% lower qoq, slightly below market expectations of $72m. However, revenue of $907m (-6% yoy) was in line with expectations.

The good news is that Venture ended the year with $192m in net cash, sharply turning around from the debt it took on to acquire GES in 2006. In 4Q08 alone, it generated $198m in free cashflow as inventory was cut from a peak of 64 days in 3Q08 to 54 days in 4Q08, in line with its historical norm. As such, its usual dividend of $0.50 a share was declared.

With the world economy in shambles, management optimistically expects that there could be a sharp drop-off in orders (perhaps 20-25% in magnitude) following which there would be a slow phase of inventory rebuilding, with 1Q09 likely to be the ugliest quarter. However, Venture believes it has a strong pipeline of ODM projects for 2009 that will stand it in good stead.

As at end-FY08, Venture is left with only $18.8m in CDO exposure (out of $167.8m) but the CDOs only expire in Dec 2009 and the risk of non-recovery could be rising. There has been defaults among some of the underlying companies but being a holder of senior debt, there is still enough subordination buffer to prevent the losses from affecting Venture.

With 1Q09 looking shaky for most tech companies, we believe a better time to consider the stock for investment would be after 1Q09, when we can better assess how the demand scenario is shaping up. As of now, we believe most companies are cutting inventory to clear their channels and that will have a negative impact on the supply chain.

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