Uncertainty about HP orders. In any case, we are not too surprised, given that one of its biggest customers - HP - has recently guided for current quarter earnings to come in below estimates. Venture derives as much as 28% of its revenue from Printing and Imaging. And speaking of HP, market has also been swirling with talks that it is looking to revamp its printer supply chain; this follows the PC giant's recent venture with Hon Hai (Foxconn) to set up a PC factory in Turkey. Those said to be affected by the shake up include Cal-Comp, Jabil and VMS. But we understand that the reallocation change likely involves HP's consumer products like inkjet printers - while this would affect VMS' OEM business, its ODM business (mainly industrial printers) should remain largely intact.
Working to contain costs. In light of greater uncertainty and the slower orders, VMS has put several measures to contain costs and improve efficiency. Key among them include reducing non-essential staff by letting contract workers go; stopping over-time and reducing shift schedules; negotiating all contracts like utilities to bring cost down. VMS will also manage its inventory more actively and reduce holding cost. And we believe that its experienced and proven management team will be the differentiating factor in making everything work.
Paring our estimates further. Following the recent developments, we have pared our FY09 estimates for revenue by 1.4% and earnings by 7.0% (assuming a further S$12m MTM loss); FY10 revenue estimate pared by 5.8% and earnings by 6.6%. Based on an unchanged valuation of 8x FY09F PER, our fair value eases from S$6.06 to S$5.64. As we also expect VMS to maintain its generous dividend payout (S$0.50/share this year 11% yield), we retain our BUY rating.
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