The surprise came from 2Q09 sales of S$846mn (+17% q-q), significantly ahead of our estimates of S$704mn. We believe the sales growth reflects Venture success in expanding into full configuration printers for its largest customer HP. (Note: sales to printer segment grew 37% q-q, ranking as the fastest-growing segment). Given that the complete assembly business has lower margins, Ventures’ gross margins fell 90bps q-q to 9.6%. That said, despite the lower gross margins, EBIT margins rose 27bps q-q to 4.4%, reflecting cost-cutting.
In this downturn, several smaller CMs, were faced with lengthening cash cycles, as OEMs asked for better terms. In contrast, Venture has made solid improvements. Cash cycle in days fell by 17 days q-q to 61 days in 2Q09, versus typical 70-75 day levels. This marks the lowest levels since FY05. This resulted in operating cashflow coming in at S$70mn, (versus profit of $40.2mn); this brings 1H09 operating cashflow (OCF) to S$169mn and free cashflow (FCF) to S$158mn for an OCF yield of 14% and FCF yield of 13% (annualised).
The main cut came from inventory — which fell by 20 days to 53 days. We believe the cut was owing to finished good inventory. Given the high-mix nature of products Venture makes, these levels strike us as too low. Indeed management said they are scrambling to get components as business momentum improves.
In our view, cashflow and margins will set Venture apart from its EMS peers during this downturn. Given Venture’s success in expanding into full configuration printers for its largest customer HP, we now forecast a 10% y-y drop in sales (earlier: -25.4% y-y). For FY10F, we now forecast sales growth of 11.8% y-y (earlier: 10.1% y-y) to reflect the new customers as discussed above. We have raised our profits by 19.9% for FY09F and 13.9% by for FY10F.
Given earnings uncertainty across the EMS segment, we use P/BV as a valuation metric. The US EMS players have been fairly aggressive in cleaning their books, writing off large goodwill balances. By contrast, goodwill at Venture stood at 34.6% of equity at end-2Q09. To make an apples-to-apples comparison between Venture and peers, we strip out goodwill from BV to derive adjusted BV. In addition, we add back net cash/share (S$1.31 at end-FY09F) in arriving at our price target (methodology unchanged). We believe that this compensates for Venture’s cash on balance sheet, versus debt for its peers. Our revised price target is S$10.06 (previously S$8.86).
Upside to our cash balance could come from recovery of CDO maturing on 20 December, 2009, will raise cash per share by an additional S$0.44. Management believes they can recover the full amount when the CDO matures, but to be conservative, we await the cash inflow. Downside risks to our price target could stem from delays in ramp with new customers in FY10F.
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