Venture - Forecasts slashed but $4.01 should be good support

Venture’s share price pulled back sharply from a results-induced rally last week on rumours that major customer Hewlett Packard could be shaking up its printer supply chain again, a move that could adversely affect the non-ODM side of Venture’s business with HP, as well as recent management feedback that HP’s orders in Jan-Feb to Venture have already fallen by 20-50% across product lines.

There is talk that Hon Hai is taking market share in HP’s printer business away from existingsuppliers such as Calcomp, Flextronics, Venture and Jabil. HP’s printer shipments plunged 33% in 1Q09. While Venture has increased ODM business (enterprise printers) with HP, its non-ODM business (consumer printers) could be hurt by allocation shifts. ODM accounted for 35% of sales in FY08, up from 25% in FY07.

Depending on the product line, HP’s orders have apparently fallen by 20-50% yoy in Jan-Feb in a knee-jerk reaction to disappearing demand that has caused channel inventory to jump. It is still too early to tell if Mar will stabilise. Further, management hinted that while its ODM business with HP is secure, the development cycle could extend longer than expected and there may be less volume benefits in FY09.

We have slashed FY10-11 forecasts by 25% and 19% on the back of HP, but as we do not expect Venture to go into the red, we believe a good support level will be its shareholders’ equity stripped of goodwill and CDO of $4.01.

The bad news still ahead in 1H09 should create volatility in the share price that will allow investors to build trading positions in the stock from time to time. However, we think it is too early to build long-term positions as Venture still trades at a premium to similarly cash-rich peers, even on a net cash-stripped PB basis - a method we believe is more conservative than price-to-earnings or even normal price-to-book.

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