Venture - In a recovery phase

In Venture’s recorded 2Q FY09 results we liked the recovery in revenue, increased traction with customers for ODM projects and strong free cash flow, while we disliked the slow recovery in recurring net profit margins.

Better-than-expected 2Q FY09 results. Venture’s net profit for 2Q09 was S$61m, above our and Bloomberg consensus forecasts due to a S$25m write-back of collateralised debt obligation (CDOs) and a higher revenue base. Revenue for 2Q09 was S$846m, up 17% QoQ (-13% YoY), above our forecast of S$818m due to strong sequential growth in the printing and imaging segment (+37% QoQ). In 2Q09, all other business segments recorded sequential revenue growth except for the test and measurement segment. Core net profit margins in 2Q09 rose to only 4.8%, up from 4.3% in 1Q09, due to pricing pressure and a change in product mix. Venture generated about S$70m in free cash flow in 2Q09 due to a reduction in working capital (down S$75m QoQ) and increased operating profits. As at the end of 2Q09, Venture holds S$20.7m CDOs in book (12.3% of host value).

Positive on outlook. Management is cautiously optimistic about its 2H09 business and expects core profit margins to recover moderately due to a weak product mix. Venture has observed an increased lead time of certain components (including connectors). Its workforce is also fully utilized now. In recent months Venture added many new projects and customers for its low-margin EMS and its high-margin ODM/Enterprise solution businesses. The company expects a contribution from these products beginning next year. Venture expects its mine tracing and RF surveillance systems to contribute revenue beginning in 2H09. The company also engaged one European aerospace customer in 2Q09.

We maintain our six-month target price of S$10.00, based on a fully diluted target PER of about 14.3x on our FY09 earnings forecast (about 12.0x on our FY10 forecasts).

We raise our 2009 revenue forecast by 1.5% on higher contributions from printing and imaging. We lower our net profit forecast by 3% on lower margin assumptions.

We maintain our 2 (Outperform) rating because: 1) we believe earnings from highmargin product segments should rise next year in line with a recovery in the IT investment cycle, 3) we like Venture’s strong free cash flow, and 4) we see upside potential to the FY09 cash dividend (subject to the recovery of CDO money).

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