Recovery has started in 2Q09. HPQ’s super lean inventory, enough for just 25 days of sales at end April, likely helped Venture to get busy in 2Q09 and increase revenue by 12% QoQ, a positive contrast to the 20% QoQ revenue contraction in 1Q09. Venture will report 2Q09 results on 7 August, where we expect net profit of S$37m, +32% QoQ (ex CDO related accounting gains).
We expect further positive momentum in 2H09 as Venture has rehired up to a third of the positions reduced in 4Q08. Better utilisation in 2H09 will likely improve Venture’s operating margins, which we believe will lead to a 30% HoH improvement in operating profits. We still peg these improvements within a generous inventory restocking framework (similar to the scenario back in 2001/02). We have not yet adopted the view that meaningful end demand growth has returned and thus have not materially changed our forecast for FY10 – this will thus be the fuel for the next leg-up in share price upgrades.
A bonus from its CDO portfolio? Venture’s S$168m worth of CDOs (now booked as mere pennies to the dollar) matures 20 December 2009 and the current spread on the Markit CDX North America Index has further improved to 116bp (vs 137bp at end June and 237bp at end March), improving the probability of some recovery of the principal. While we would expect some mark-to-market benefits from the 2Q09 results onwards, the real benefit for shareholders would be a special dividend – we believe any cash realisation from this portfolio will raise the potential of a boosted dividend for next year.
We have raised earnings forecast for FY09 by 12%. We have not factored any addition from gains from its CDO portfolio into our forecast for 2009. 12-month price target: S$9.80 based on a DDM methodology.
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