Venture: maintain Buy and introduce VCAM

We believe Venture’s high mix/low volume business model combined with its broad client portfolio has helped improve its gross margins to 20% in 2008 from 16.8% in 2004. Supported by dependable management, diversified customer base and its focus on providing high value-added design services, instead of competing on pricing with other EMS peers, we expect Venture to maintain its operating margin at 6-8% in coming years.

We tracked earnings of Venture’s key customer IBM, which reported lower than expected hardware revenues, while reiterating its 2009 EPS outlook of US$9.20. However, we expect hardware demand to remain challenging throughout the year, given the constrained IT budgets with greater focus on reducing expenses rather than building IT infrastructures.

We maintain our 25% q/q sales decline estimate for Q109, while raising net income estimate to S$33m after downwardly adjusting CDO-related write-offs for 2009. We forecast Q209 revenue/earnings to be stable at S$705m / S$34m.

We revise our 2009E/2010E EPS estimates from S$0.51/0.73 to S$0.61/0.72 factoring the CDO related adjustments and introduce 2011 EPS of S$0.76. We continue to derive our price target using DCF-based methodology but now explicitly forecast long-term valuation drivers with UBS’s VCAM tool.

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