Venture Corp - A take on inventory restocking trade

We give Hewlett Packard’s (HPQ) 2Q09 results a closer read to gain insight on the rate of technology inventory destocking. We maintain our Outperform rating on Venture with an unchanged target price of S$8.30.

Halfway mark for inventory restock trade. HPQ has managed its inventories well – inventories declined 25% YoY, keeping pace with the 19- 28% YoY decline for its three hardware divisions. Its current inventory position is lean at 25 days, below its usual 30+ days run rate (this though is noisy data as we cannot strip out the impact of the EDS acquisition). We have said in a previous note that two sequential declines of 30% QoQ in semiconductor shipments over 4Q08–1Q09 (similar to 4Q01–1Q02) would mean that the current inventory restock phase would last six-to-nine months, the same as in 2002. Based on this framework, and taking February–March as the point when fresh orders were handed out, we suspect that HPQ’s suppliers are now at the halfway mark on their inventory restock trade.

‘Stronger’ in China. While HPQ offered no fresh clues on any real pick-up in demand, it did say that the improvements it saw in China were material (HPQ has 12% PC market share in China), and that small improvements were also seen in the US consumer segments. HPQ’s overall revenue guidance for next quarter was soft though at a 4–5% decline vs a 2–4% decline previously. Print and imaging trajectory in line. Print revenue declined 23% YoY, with the sharpest fall in consumer printers (-36% YoY). Overall printer unit sales declined 27% YoY, which would be within range of the 35% EBITDA decline we expect for Venture in FY09.

For Venture, beyond operational improvements, we are also looking for CDO mark-to market benefits from 2Q09 onwards. Its CDO portfolio at end-1Q09 was only 3.5% of par value of S$168m. We would expect some mark-to market benefits from 2Q09 onwards. This portfolio matures on 20 December 2009 and we believe any cash realisation from this portfolio will raise the potential of boosting the dividend for next year.

12-month price target: S$8.30 based on a DDM methodology. Our DDM-derived target price of S$8.30 implies an FY09E PER of 11x. Venture shares have risen by 52% YTD vs 28% for the STI. We believe its capex-light ODM model will still to allow it to pay a S¢50 dividend in FY10.

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