2Q09 outlook cautiously improving. Although management expects 2009 to remain challenging, it also noted that it has seen some improvements in some customers' forecasts; this has already resulted in monthly improvement in sales since late Feb. VMS will continue to pursue growth through addition of new customers, which we understand will be through its ODM projects - management revealed that there were >25 such projects under development and has made entry into the aerospace sector with a reputable new customer. In the longer term, it targets to develop as many as 10 solution enterprises from its existing operations (mainly those in product marketing and distribution channels) - to enhance its value creation.
Potential CDO writebacks. VMS has already almost fully marked down its original S$167.8m CDO2 investment to S$10.9m, and should credit markets improve, we can expect potential writebacks in the next few quarters; however, we prefer to remain conservative and only adjust our numbers if/when it get its full investment back by end Dec. Meanwhile, we believe our FY09 estimates already reflect the still uncertain environment and we will leave them intact until we see more concrete signs of recovery. As such, our fair value remains at S$5.64 (based on 8x FY09F PER). As the stock has run up nearly 25% since our upgrade in March, and the current prices exceeds our fair value by 4.7%, we downgrade our rating to HOLD; but we still think that the company remains fundamentally sound and its S$0.50/share dividend payout remains sustainable (8.4% yield).
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